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Investors Brace for a Difficult Earnings Season - July 13, 2020

Q2 earnings season unofficially gets underway this week, and investors are bracing for a steep decline in profits.

But does it matter? Are investors already discounting better economic data in the second half of the year and a rebound in corporate profits in 2021? Will investors give companies a pass on Q2?
As earnings season begins, profits are forecast to decline by 44% versus a year ago. That’s a far cry from a projected 11.7% decline on April 1 and the forecast of a 7.2% increase on January 1.

Clearly, the Covid-induced recession is the cause. Might analysts be too pessimistic? It’s possible, as a July 8 article in the Wall Street Journal suggested. Throughout the expansion, analysts have been too cautious, and firms managed to top a low hurdle.
Still, over 40% of the companies in the S&P 500 have withdrawn quarterly or annual forecasts (through June 25, WSJ). There simply are too many unknowns. Additionally, any forecasts that might be offered for the second half could change significantly as the year progresses.

If companies manage to beat lowered expectations, investors will keep close tabs on any projections and guidance.
We may see some cautious optimism amid the recent pickup in economic activity. But the spike in Covid cases in much of the country could be problematic and reduce visibility going forward.

Thoughts

The rally off the March 23 low and new highs in the tech-heavy NASDAQ have been impressive, especially given the depth of the recession and the question marks over the future. Unprecedented Fed action has helped. Despite the uncertain environment, investors are trying to price in a recovery in profits next year.
As has been repeated often, the path of the virus and the development of a vaccine and/or effective treatment are wildcards and will likely play a big role going forward. Prevent the spread or cure the disease in its early stages, and you would increase confidence to go back in public.

@LWMLLC