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X August Newsletter – 5 Things to Know This Earnings Seasons
Posted on August 5, 2020

August Newsletter – 5 Things to Know This Earnings Seasons

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Earnings season always creates a lot of chatter, but this one is worthy of all the buzz. The Q2 reporting season will mark the first quarter that shows the full brunt of lockdowns that shuttered activity. Here are five things to know heading into this earnings season.

 

  1. It’s tough to be disappointed when your expectations were already low.

 

Investors are bracing for the worst earnings season since 2008…and it just so happens to follow the best quarter for S&P 500 returns in 20 years. Analysts have cut profit estimates at the fastest pace on record, and consensus is calling for S&P 500 Q2 earnings to contract an eye-popping -45% versus the year prior (last quarter, EPS dropped by -15% over the prior year, but six of 11 sectors still eked out positive growth). For Europe, the outlook is even bleaker—analysts are calling for a -61% decline in earnings year-over-year.

 

  1. Expect a big divergence between sectors.

 

All 11 S&P 500 sectors are expected to post negative year-over-year earnings per share growth—an all-too-familiar reminder that no one has been really immune to the global shutdown.

The hardest hit sector looks to be energy (plagued by a shutdown in demand, and in the case of oil, a glut of supply), joined by consumer discretionary (think: leisure, apparel and restaurants), industrials (remember airlines?), and financials (which were the biggest disappointment in Q1). Each of these sectors is expected to see earnings contract this quarter by -50% or more!

 Meanwhile, tech companies (which, by the way, represent 30% of the S&P by both market cap and by aggregate earnings per share) look set to continue their triumphant stride—analysts are expecting earnings to contract by only -9% versus the prior year. The utilities sector also looks likely to come out relatively unscathed—earnings are expected to contract by only -3% this quarter.

 

  1. Uncertainty abounds.

 

Most CEOs have abandoned forecasts for Q2 results. Heading into this season, there have been only 49 preannouncements for S&P 500 companies—a far cry from the five-year average of 106. Those preannouncements are also pretty mixed: 27 companies have seen negative revisions, while 22 have seen positive revisions. Albeit the small sample size, that positive/negative balance represents a 55% miss rate, which is actually better than the 70% average. We’ll take all the bright spots we can get.

 

  1. Investors care most about turning the page.

 

Similar to the “pass”’ that markets gave the abysmal economic data of March/April, investors are calling this earnings season (and all of 2020’s) a wash. Instead, 2021 earnings expectations are in focus—which, by the way, are roughly in line with where earnings were in 2019.

As the results roll in, investors will be particularly focused on what forward guidance companies might provide for the quarters ahead; 183 S&P 500 companies have already withdrawn guidance, and it’s likely this trend will continue into Q3. Nonetheless, we’re keen for whatever information we can get—in particular, what margins might look like, the process of reopening and key changes in operations, and the future of dividend payments.

 

  1. The earnings recovery will likely follow the economic and market rebound…eventually.

 

Over the last two months, economic data has continued to inflect higher, following the lead of markets. So will earnings follow too? We think so, but it may take some time. Earnings lag, and with the path of the virus still uncertain and rollbacks of reopening occurring in some areas of the country, it’s likely corporate profitability will hit further bumps in the road. Q3 earnings will likely fare much better than Q2, but we think the real rebound in earnings will come in 2021.

 

Avoid Blindly Following Random Benchmarks on the Road to Retirement

 

Investment benchmarks are kind of like all those random signs you pass on the road. Sometimes, they’re informational. Sometimes, they’re entertaining. But all too often, they’re just downright distracting. And if you put too much focus on the wrong ones, you could end up hurting your chances of ever getting where you want to go.

Unfortunately, all too often, investors do just that. Their attention is diverted by a benchmark that doesn’t necessarily apply to them or their plan — such as the S&P 500 index— and it can lead them astray. Suddenly, they’re moving out of their comfort zone, driving faster than they should, and maybe even taking a wild turn off the road they’re on despite the added risk of getting into a crash or running out of gas.

There’s little point in constantly checking your progress against an index or someone else’s portfolio results if they aren’t relevant to your investment strategy or your unique needs. The only measure you need to monitor is how you’re doing when it comes to your own goals, risk tolerance and timeline.

Here are some things you should be thinking about — and planning for — on the road to retirement.

1. What’s your destination? A lot of people have no idea where they’re going in retirement. They haven’t even thought about the income they will need to replace when they don’t have a regular paycheck anymore. So that’s the starting point: How much will you need to pull from your investments to have the lifestyle you want? When do you hope to retire? How many years do you expect to be creating your own paycheck? Where will the money come from (Social Security, a pension, your 401(k), a Roth IRA, or some other source) and in what order? Your income plan will be your roadmap in retirement — but it also will help guide you as you make your way toward that goal.

2. How fast or slow do you want – or need – to go? Once you know where you’re going, you can choose the right investments for the journey based on the risk vs. the reward. If you jump into an overly aggressive strategy, you might get to your destination faster — or you might not get there at all. On the flipside, a strategy that’s too conservative might end up falling short of what you need — or it might not keep up with inflation over the course of a long retirement. It’s important to know both your risk tolerance and your risk capacity to determine your portfolio mix. An appropriate blend of stocks, bonds and other investments can help you get where you’re going on time and in good shape.

3. Are you burning more fuel than necessary? It’s essential to make tax efficiency a part of your retirement plan. That means looking at how and when each of your investments will be taxed and making any changes that might keep more money in your pocket.

Bottom line – while it may be ‘fun’ or ‘easy’ to compare your investment portfolio to an index, doing so is not making a fair comparison. It is more like comparing apples-to-oranges. Our goal is to help design and allocate your portfolio with an appropriate risk budget that can both help you pursue your goals, while at the same time not taking on more risk than is within your comfort zone.

 

Did You Know:

STILL DOWN BUT COMING BACK

– As of the date that the CARES Act was signed into law by President Trump (3/27/20), total spending by American consumers was down 30.2% from total spending in the country in January 2020.  As of 7/01/20, total spending by American consumers had rebounded and was down just 9% from total spending in January 2020 (source: Opportunity Insights Economic Tracker).

SPENDING DECLINES AS WE AGE

The average retired couple spends 23% less money in their 6th year of retirement compared to what they spent in their 1st year of retirement (source: Health and Retirement Survey).

WE NEED JUST ONE

There are 197 vaccines for the COVID-19 pandemic currently in the development stage, none of which has yet to receive FDA approval (source: Milken Institute).

 

Quotes:

“Worry is like a rocking chair: It gives you something to do but never’ gets you anywhere”- Erma Bombeck

“Don’t let the fear of the time it will take to accomplish something stand in the way of your doing it. The time will pass anyway; we might just as well put that passing time to the best possible use.” – Earl Nightingale