Earnings hopes wilt as fresh Covid outbreak throws 2021 reopening in doubt. That's the story of earnings season so far.
It's the one word investors didn't want to hear: lockdown. Never mind it's mostly in Europe, and only partial. "Lockdown light" still has a bad ring to it.
We are now halfway through a spectacular third quarter earnings season. So far, 85% of companies have beat expectations by an astounding 19% on average, well above the historic average beat of 3% to 5%, according to The Earnings Scout.
The result is the market has shrugged. The S&P 500 is 8% below where it started on the day earnings season began Oct. 13.
What went wrong?
It's simple: Wall Street doesn't live on past earnings reports, however good they may be. It lives on future earnings projections, and they are now in danger of going south.
Wall Street is being hit with a quadruple whammy: 1) the reopening narrative is in trouble, 2) stocks are richly priced even for an economic recovery, 3) strong earnings reports are not moving stocks up, and 4) CEOs are again for the most part declining to provide guidance, leaving analysts to themselves.
What's wrong with the reopening story?
Wall Street was betting that the reopening would continue to proceed without lockdowns, and that additional stimulus would be coming that would be the bridge to a vaccine that would be widely available sometime in the second quarter.
Then Europe happened. Germany and France closing bars and restaurants for at least a month.
Lockdowns? We were supposed to be learning to live with Covid.
"Lockdowns were off the table, but now we are dealing with lockdown light," Alec Young from Tactical Alpha told me, noting that even if outright lockdowns do not happen in the U.S., a widespread slowdown in economic activity — with many simply refusing to go out regardless of whether stores and restaurants are open or not — is increasingly likely.
Lockdown worry is messing with the earnings narrative
Third quarter numbers have been great, but Wall Street has been betting that the following three quarters (Q4, Q1, and Q2) will also see sequential improvement as the reopening story proceeds:
S&P 500 Earnings: high expectations (estimates, YOY)
2020
- Q2 down 30%
- Q3 down 16%
- Q4 down 12%
2021
- Q1 up 14%
- Q2 up 44%
Source: Refinitiv
The "lockdown light" story kills a lot of this.
"The improvement in earnings is underway. Any prolonged shutdowns will put an end to that improvement," Nick Raich from Earnings Scout told me.
Still no guidance for clueless analysts
In the past few days, a raft of large companies have reported earnings better than expected, but have declined to provide guidance to analysts. That group includes General Electric, General Dynamics, Boston Scientific, Boeing, Tupperware, Mastercard, Caterpillar, MMM, Xerox, Stanley Black and Decker, Harley Davidson, Raytheon, UPS and Corning.
Typical is UPS, which reported excellent earnings but spoke for most of corporate America in declining to provide guidance "due to the uncertainty around the timing and pace of the economic recovery."
Put it all together, and you have a high degree of macro uncertainty, with stimulus doubts, lockdown light, uncertainty on the timing of the vaccine, and the election.
It's an explosive combination. "What we have is the collision of uncertainty and high valuations," Rebecca Felton from Riverfront Investment Group said in an interview on CNBC.
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