The stock market may have a difficult time gaining traction as investors hear first-hand how the economic shutdown is hitting the bottom lines and balance sheets of corporate America.
Analysts describe the start of the first-quarter earnings season as a time of transition for the market, with JPMorgan, Wells Fargo and Johnson & Johnson reporting Tuesday. The market had been responding positively to signs the coronavirus outbreak was slowing, but it may now try to assess how much damage has been done.
An increasing number of analysts say the late-March selling crescendo may represent the bottom for the market. Goldman Sachs analysts Monday said that thanks to a heavy dose of both fiscal and monetary policy, it appears the lows are in, unless the virus surges again after the economy reopens.
Health officials have been more optimistic that the outbreak is slowing and that some parts of the country could reopen in May, but it will not be a quick return to normal.
"I think we're in a new phase. The stock market bottomed when the cases in Italy seemed to peak. It's been driven by terrible, and not as terrible news on the virus, plus a tremendous policy response both on the fiscal and monetary side," said Ed Keon, chief investment strategist at QMA. "A big part of the initial phase has been reversed. What we're trying to wrestle with now is what the next couple of years look like."
Peter Boockvar, chief investment strategist at Bleakley Advisory Group, said the market will get a dose of reality from corporate earnings as it looks toward the reopening of the economy. Both earnings and economic data, like retail sales later this week, should show the impact of the stay-at-home orders.
"This is going to be a long slog. Any opening, and we're all hoping it happens in the next four to six weeks, is going to be drawn out and slow, and life is not going to be what we're used to. That reality we face is what's coming next," said Boockvar. "I think company balance sheets is going to be where the focus is going to be. ...The bottom line is who is going to get through this and who is not."
Keon said he's not sure whether the market has reached its low, but the earnings season may be a time for the market to pause as investors evaluate what companies are saying and what they are unable to say. So far, more than 70 S&P 500 companies have withdrawn guidance and more expected to join them.
For the first quarter, S&P 500 companies are expected to report at least a 10.2% decline in profits, as the virus shutdowns hit the economy hard in the final month of the quarter. According to Refinitiv's I/B/E/S data, second quarter earnings are expected to decline by 22%, and by another 10.6% in the third quarter.
Financial companies are expected to see a 21% decline in first quarter profits, while consumer discretionary companies are expected to decline by 30%r, according to I/B/E/S data. The worst sector is expected to be energy, down 50%, followed by industrials, down 31%.
According to Bank of America strategists, the health care and consumer staples sectors should hold up better than others and are more likely to have positive earnings surprises. Health care earnings are expected to be up just 1%, and consumer staples just about the same.
"We think most of the damage is done, given the rally off the lows," Keon said. "I wouldn't be surprised to see it go up and down here probably quite violently as we have for the last couple of weeks. I just think the risk/reward equation is not compelling."
The S&P 500 was off about 1% Monday at 2,761, after gaining 12.5% in the past week, its best weekly performance since 1974. The S&P 500 hit a low of 2,191 on March 23, in a 34% decline. Analysts have said the market may look past some of the earnings numbers, but the company comments and lack of ability to forecast could be troubling.
"How will the economy react? How will people react Will we go back to old habits soon or will it take a year?" said Keon. "We'll see the guidance of course, but ... the companies will be guessing just as we're going to be guessing what the impact will be."
Energy companies with high debt are seen as vulnerable, as are companies in travel and leisure and some retailers. "Not every company is going to survive this downturn and so trying to sort out which ones are likely to survive and which ones will thrive when this is over is gong to be a challenge for investors," Keon said.
Boockvar said companies, like Johnson & Johnson and Coca-Cola have solid balance sheets, but other companies could send up red flags. "It's going to be a different type of conference call than a lot of people are going to be used to, when you're going to have equity guys asking questions about debt covenants," he said.
Some companies will also be slashing dividends to preserve cash. "A good balance sheet can turn into a bad one rather quickly when you're revenues are going to zero," said Boockvar.
As stocks sold off Monday, bonds were also selling off. The 10-year yield was at 0.74%, and it was reacting more to the Fed's policies, while equities keyed off of earnings, said Michael Schumacher, director rates at Wells Fargo. Typically investors buy bonds while stocks sell off.
"The whole bond equity correlation is still misbehaving. We think that's a canary in the coal mine that there is still balance sheet disruptions and not everybody is focused on the same type of thing," he said. "In a month or two, it might come together."