Is the Earnings Bar Low Enough?

This earnings season will be unlike any other, as travel restrictions and lockdowns related to COVID-19 have impacted results dramatically.The biggest economic hits came in mid-March, however, and won’t be fully captured in first quarter results. This makes company guidance particularly important as market participants look for clues into what earnings may look like for the rest of the year.


It goes without saying that this will be a reporting season unlike any other. For some companies less impacted by the COVID-19 pandemic, the numbers may appear normal. For others, the focus will be on balance sheet strength and survival. The separation between winners and losers is widening in this environment.

Turning to the numbers, with 41 S&P 500 Index companies having reported results (mostly with quarters ending in February), index earnings are tracking to a 14% year-over-year decline, down from the 4% increase expected on January 1 and 5% decrease expected as of March 31. We think even these lowered estimates may be tough to achieve, given heightened uncertainty during the pandemic, the significant number of companies that have withdrawn their guidance for analysts, and lingering stale estimates.


We highlight four main themes for this earnings season:

Don’t count on a low bar. The bar has been lowered significantly, which is typically a recipe for better-than- expected results. According to Bespoke Investment Group, analysts have raised estimates for only 88 companies in the S&P 1500 Index over the past four weeks, while 1,236 companies have seen estimate cuts, the most since at least 2008. However, with so many companies having pulled their guidance, and the dramatic changes in economic conditions over the last few weeks of the quarter, misses may be more prevalent than they typically might have been, even in a recession.

There will be winners. This environment may also provide opportunities for some well-positioned companies:

· So-called “stay-at-home stocks,” many of them in internet, digital media, and e-commerce, have performed well recently in anticipation of strong results.

· Many consumer staples companies are helping us stock our shelves and eat all of our meals at home.

· Even before COVID-19, healthcare companies enjoyed perhaps the best visibility into their near-term earnings prospects. They’re playing a key role in testing and treatment and are big stimulus recipients.

· Results for the technology sector may surprise to the upside, based on the relative resilience of the sector’s estimates in recent weeks and current mobility and work-from-home trends.

Finding the floor. For companies most impacted by COVID-19, the focus will be on survival more than anything else. It will be about balance sheets and cash piles. Some of the hardest hit areas will include travel- related businesses, such as airlines and hotels, and certain brick-and-mortar retailers, restaurants, and entertainment companies that are deemed non-essential and depend on public gatherings. With oil prices having fallen more than 60% in the first quarter, earnings in the energy sector may be extremely challenged.

All about guidance and scenarios. With so many companies pulling their outlooks, analysts and strategists forecasting in this environment have had to do some guessing. Given the uncertainty, investors will be looking for help developing credible scenarios depending on how long the stay-at-home orders remain in place. Every country and state is in a different place, increasing forecasting difficulty.