Coronavirus-Hit Earnings Are Coming

Coronavirus-Hit Earnings Are Coming

almost 4 years ago3 mins

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After a record-breaking first quarter – for all the wrong reasons – companies will shortly begin showing investors exactly how badly they’ve been hit by coronavirus so far, and telling them how long they think the negative effects will last.

🕰️ Recap

  • In late February, the world’s largest beer brewer, AB InBev was among the first to warn that its profit would be hit by the coronavirus
  • Zoom Video Communications’ fortunes, meanwhile, looked brighter in early March thanks to a rapid increase in new users
  • Earlier this month, several companies – including British banks – discussed or announced the suspension of their dividend payments until coronavirus is under control
  • But when Tesco announced its financial results last week, the grocery store chain said it would pay a $6 billion dividend as planned

🔗 Connecting The Dots

US companies will be among the first to reveal their first-quarter earnings next week (most European companies don’t kick off their reporting until a couple of weeks later) – and you’d be forgiven for thinking that, overall, the last quarter wouldn’t have been too hard on them. Most industries, after all, weren't severely affected by coronavirus until March. But not quite: earnings are expected to be 10% lower on average than the same time last year – compared to the 4% earnings increase analysts were forecasting in December. Of course, that’s probably already factored into stock prices given their dramatic selloff last month, so investors will likely focus their attention on companies’ future expectations...

Banks generally raise the curtain on earnings in the US, and next week’s no different. Forward-looking analysts will want to see how they’ll balance record low interest rates – which reduce the profits they make from loans – against still-high volatility, which might lead to higher trading revenues as investors chop and change their portfolios. As for investment banks reliant on advising companies on deals and fundraising, analysts probably won’t be expecting them to do much business until uncertainty clears. And then there’s the question of dividends: JPMorgan, for instance, is thinking about suspending its own for the first time ever.

Weighing in at over 20% of the US stock market, the technology industry’s naturally going to garner investor attention – especially given the split that’s emerging among the biggest players during this pandemic. Analysts expect demand for Amazon’s product to continue, and they reckon its cloud business is likely to see a boost too – which might also benefit Microsoft, its rival in the space. As ad spending nosedives alongside consumer spending, on the other hand, Facebook, Twitter, and Google-parent Alphabet might see their earnings drop for a while.

🥡 Takeaways

Earnings reports often drive significant share price moves, but next week’s are likely to be even more volatile for a few reasons. For one, whether a company’s last quarter was better or worse than predicted is less important than their future forecasts, which are harder to pre-empt. For another, the movement of a stock in response to updated company forecasts won’t just depend whether they’re above or below forecasts, it’ll also reflect what investors have already “priced in”. See, analyst estimates mightn’t have completely caught up to this fast-changing crisis, making them less reliable a barometer for investors’ expectations than usual.

Most economists reckon June will mark the start of a recovery in the US and Europe, and that seems to be embedded into analysts’ company forecasts too. If a recovery ends up taking longer, some investors might find betting against the rise of stocks earns them a profit. But if things recover sooner, stocks might shoot up more quickly than those investors expect.

🎯 Also On Our Radar

Last week, private equity firm Blackstone raised an $11 billion fund targeting European real estate. It might be aiming to take advantage of under-pressure retail landlords, some of which only received a third of last month’s rent. Private equity firms have some $2.5 trillion of cash to invest, and doing so now could net them an even bigger profit in the future. Here’s how they do it.

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