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COVID-195 Mins Read

Q1 2020: Takeaways From The Earnings Season

The first of the earnings reports for this year have now come in. Valuations and projections made during Q4 2019 don’t hold much water now in the current crisis and the entire global population, from workers in factories to policymakers, managers and financial analysts are grappling with an increased level of uncertainty ahead.

At the time of writing, 86% of companies in the S&P 500 have already reported on their Q1 2020 corporate earnings, with 66% of them posting a positive EPS surprise.

Investors’ sentiments are seemingly buoyed by several factors, that include the stimulus from the U.S. government, quantitative easing program by the U.S. government, and Federal Reserve, as well as the likelihood of reopening economies. Markets have rallied close to 31% from its late March trough.

At the same time, we have seen corporate earnings coming off as companies take a hit from the onset of COVID-19 in the earlier wave.

It is worthwhile to point out that over the past 20 years, the correlation coefficient between the forward P/E ratio estimate and the monthly price of the S&P 500 is close to 0.93. Signifying that both figures tend to move in tandem.

S&P 500 Price and Earnings (EPS): Divergence between the two could indicate correction ahead
S&P 500 Price and Earnings (EPS): Divergence between the two could indicate correction ahead

 

The increase in the S&P 500 price coupled with the decrease in the earnings component have both driven a significant surge in the price-to-earnings (P/E) ratio over the past seven weeks – usually an indicator of relatively expensive asset valuation with regards to the earnings.

The current P/E stands at 23.1x, close to the level seen just weeks before the March 2000 Tech Bubble. We would note that there is a level of uncertainty in terms of the earnings estimates ahead as the world goes through a period of finding a balance between reopening its economies and containing further outbreaks of the virus.

Nevertheless, based on past data, it would seem unlikely that this level of P/E ratio continues to hold – meaning we could see either a healthy retracement of the index price or an improvement in forward earnings that would support the existing prices.

S&P 500 Price-to-Earnings Relative Valuation: High equity valuation relative to corporate earnings
S&P 500 Price-to-Earnings Relative Valuation: High equity valuation relative to corporate earnings

U.S. Market Q1 Earnings Growth

In the first quarter of earnings report, we are seeing 6 sectors reporting year-over-year growth in their earnings. This is led by Health Care, Utilities, and Consumer Staples. The outperformance of Health Care could be attributed to the rise in demand for health care services and medical supplies in the wake of the global pandemic.

Consumer Staples saw a healthy earnings growth, potentially due to the front-loading of consumer necessities as people prepare for the lockdowns.

Slowing signs from the prior quarter observed from the early effects of COVID-19
Slowing signs from the prior quarter observed from the early effects of COVID-19

 

On the other hand, 5 sectors have reported a year-over-year decline in earnings, and they are Consumer Discretionary, Financials, Energy, Industrials, and Materials.

Consumer Discretionary is admittedly the hardest hit sector as we see demand curtails in the more sensitive sub-sectors, such as Automobiles, Retail, Hotels, Restaurants, & Leisure.

U.S. Market Q2 Earnings Growth Expectations

Looking ahead, what we are seeing from most analyst expectations is a more cautious outlook with regards to the corporate earnings. In the second quarter of 2020, we are likely to witness the full impact of the various social distancing measures, work-from-home arrangements and surge in unemployment and furloughs have weighed on the earnings outlook. The result of which is likely a cutback on spending across consumers and producers as both reassess their liquidity needs in our current virus-stricken market.

It is interesting to note that according to analysts’ expectations, utilities might seem to remain a bright spark relative to the other sectors during this time, as households increase their utilities consumption due to its diversion from corporate and retail venues back into their homes.

Opportunities ahead; current quarter to feel the full extent of the virus’ impact demand
Opportunities ahead; current quarter to feel the full extent of the virus’ impact demand

 

Earnings 2020: The Final Call

Many experts have said that the world post-COVID will be different than the one we know now. As our priorities change, our patterns of spending and consumption will also change and ultimately shape the world around us in a new way. While it is still too early to make concrete predictions, and a lot is dependent on the hope of a cure or vaccine, it is nonetheless apparent that brands across all sectors will have to renovate and innovate in order to come out of this stronger.

While travel and retail may be the worst hit sectors of the economy, tremors have been felt throughout industries. Technology and healthcare are still the best bets around, and with time we will also know more about the trajectory for the others.

The general consensus is that an economic recovery is a) dependant on a cure or vaccine being found, and b) will probably happen only in the later half of the year. Till then, it is important to make all investment and financial decisions wisely and with all information handy.

With that in mind, we would like to share that Kristal.AI is able to customize and tailor investment solutions according to our investors’ outlook. To know more about what our analysts think of the current market trends, do write in to us as at advisory@kristal.ai and we will help you craft a personalized portfolio that suits all your needs, and is resilient to the market upheaval.

Stay Safe!

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

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