- Most companies in the S&P 500 are not providing guidance for future quarters.
- Corporations are reporting a lot of "good news, bad news" stories that are not easy to reconcile.
- Analyst estimates vary widely, indicating they "have just given up."
Half of the S&P 500 companies have reported earnings for the first quarter and this has been the strangest earnings season imaginable.
- Global activity has ground to a halt in some sectors but has accelerated in others.
- Most companies are withdrawing full year guidance, yet the S&P 500 is only 15% off its historic high.
- Many analysts seem clueless. The dispersion — the difference between analyst estimates from the high to the low estimate — has never been higher, making estimates particularly difficult to interpret. "You have a lot of analysts who have just given up, who have not revised their estimates," said Refinitiv's David Aurelio, who tracks corporate earnings. "Some of them cannot keep up with the bad news."
With such confusion, why bother looking at earnings?
Given all this madness, does anyone care about earnings and commentary right now?
The answer is yes, for two reasons:
- After the big drop in March and the recovery in April, investors are going back to an old pattern: rewarding companies that surprise on earnings and punishing those that disappoint. Aurelio notes that among those companies that have reported earnings so far, those that beat on average rise 1.4% two days after after they report, and those that miss are down 2.4%.
- Though most companies reporting are declining to provide full-year guidance, you can still find clues in how companies are viewing their operations for the second half of the year in the commentary and analyst calls. Specifically, is there any rebound at all?
We're doing well, but we're not doing well
Corporations are reporting a lot of "good news, bad news" stories that are not easy to reconcile.
Shipping giant UPS is getting more revenues from Americans shopping online, but delivery of shipments to businesses has shrunk dramatically.
3M is making money selling its N95 masks and noted strong growth in personal safety products, but it is still laying off workers in other divisions and withdrew its full-year guidance.
Music streaming service Spotify reported a loss that was less than expected and added more users, both paying customers and those who listened to its free ad-supported category. But it lowered its revenue guidance for the year as ad sales fell.
Even food companies are having a tough time figuring out what' going on. You'd think snack-maker Mondelez would be doing better: They make Oreos. They did beat estimates, and consumers certainly stockpiled food. But the company withdrew its 2020 forecast due to uncertainty surrounding the impact of the virus.
You'd think the lab-testing business would be booming, but no. Even testing giant Laboratory Corp., which reported better-than-expected profits and is rolling out a new coronavirus antibody test, is withdrawing 2020 guidance due to the pandemic and taking other actions including furloughing workers.
So why are the markets doing so well? Analysts point to hopes for a gradual reopening, combined with a dramatic expansion of testing, as well as better news on potential treatment modalities, all of which are helping investors convince themselves that some bottom was hit in March.
"Markets are trading on an increase in clarity," Jenny Harrington, CEO and portfolio manager at Gilman Hill Asset Management, said on CNBC's "Halftime Report" on Wednesday.
Nick Raich, who covers corporate earnings at the Earnings Scout, agrees. "The markets are speculating that the worst of the earnings cuts are coming in the second quarter, which we are in now," he said. "By the time the companies report second quarter earnings in July, the majority of the downward cuts will be known."
Several companies have been trying a similar balancing act — providing little guidance but sounding vaguely optimistic —and investors seem to be buying the narrative.
Google-parent Alphabet talked about a difficult quarter as consumers are shopping less, but sounded cautiously optimistic that a drop-off in ad revenues in March was starting to moderate.
Truck engine maker Cummins withdrew guidance but also said it is seeing business ramp up slowly in April, after hitting a low earlier during the coronavirus pandemic.
Both are trading up since their earnings report.
Finally, there is this hopeful comment from Facebook, which just reported earnings:
"After the initial steep decrease in advertising revenue in [the last three weeks of] March, we have seen signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020."