Earnings and Expectations

April 17, 2020

Things are developing so fast that trying to put a year end number on something is a fool’s errand, but that doesn’t mean I’m not going to try.

As I started looking at earnings for the year end, which I finally settled at $153 (which will be a 9% reduction in earnings this year), I realized that simply trying to put an equal line between now and then will actually give you the wrong message. The market is the ultimate pre-pricer of all commonly known things, and I suspect that this market will rally back long before data starts to come in.

Now as I hope you all know, the market overshoots in both directions. Just because the market says it, doesn’t make it so. However, I do appreciate that given we are in uncertain times, we may need some more frequent data points. So, I decided to break down the 2020 year into quarterly earnings rather than simply a year. The $153 of earnings I’m estimating will be given to us by the companies in the S&P 500 will not come equally. The first quarter earnings will be affected, and the second quarter may be worse, and we are all expecting the third and fourth quarter to see a rebound.

I updated the Buy/Sell to give you visual reference points at the end of each quarter. Now, the reason that I haven’t ever done this before is that I’ve always argued that the market is the ultimate pre-pricer of all commonly known things, and I argue that it attempts to price earnings 6 months ahead. However, the difference of earnings each quarter is as big as I’ve ever seen it.

When I was putting the data in, I wasn’t sure what the chart would look like. Wow, what a crazy looking chart. 

Let me give you a couple of disclosures. My estimates of quarterly earnings are a best guess scenario as we really haven’t heard much from companies. A large number of them are in quiet periods right now with earnings approaching next week. I referenced the last two bear markets to determine what type of earnings impact we had. There were sectors (tech in the dot com era and financials in the 08 crisis) that had negative earnings, however there were other sectors that held in there well.

This time around I believe it will look the same just with different players. I expect tech companies will exceed expectations and obviously the travel/retail/dining companies will drag us down. Also, oil, which is already pricing in devastation, have little to give us. 

It all comes back to earnings. EVENTUALLY!! This time will be no exception, earnings are especially fluid right now. Given the foundation the Fed and Treasury has given us with unprecedented liquidity, we may get back to looking at earnings as the true valuation of markets. Next step, getting business flowing again.

As always should you have any questions or concerns, please don’t hesitate to give me a call.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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