U.S. stocks are coming off their biggest week of gains since 1974. The S&P 500 rebounded 25% from a low reached on March 23rd, and so did the broader market average.
The market’s latest rally has been fueled mainly by three factors: an improving outlook on the coronavirus outbreak, massive monetary and fiscal stimulus and stabilising oil prices.
So yes, we have seen some hope that the coronavirus crisis may be peaking. But are we celebrating too early?
Brace for A Wild Earnings Season
Aside from the obvious virus updates, this week’s focus will be the commencement of the March 2020 quarter earnings season. Four times a year, investors assess the performance of companies worldwide all weighed in comparison to analysts’ predictions and what rivals report.
This earnings season, with the coronavirus pandemic claiming lives and sowing chaos across the globe, those yardsticks are mostly meaningless, as investors lost in a fog will be looking to size up the degree to which companies have been hit and what it means for their ability to generate revenue, profits and cash flow.
Ready, Set, Report
JPMorgan, Wells Fargo, and Johnson & Johnson are among the firms set to announce their first-quarter results on Tuesday, with more major reports coming later in the week. Other pharma and health care earnings will also be closely watched for any news of progress on the testing and treatment fronts.
The kickoff of this week’s earnings season will give investors a first glimpse of the impact of the coronavirus shutdown on corporate profits- and possibly clues about the outlook for the rest of the year.
With uncertainty and limited insight into what the coming months might bring amidst the pandemic, many Wall Street firms are expecting a sharp contraction in the majority of corporate profits, accompanied by potentially large price swings.
Look Out for Liquidity & Cost Cutting
Heading into an atypical earnings season, many analysts share the opinion that from an investor’s point of view, understanding the debt dynamics of a company is important. Hence, liquidity is crucial in a period when earnings are so artificially depressed.
A free cash-flow yield, the measure of money coming into a company’s bank account, can be a good way to assess whether a company can keep meeting obligations like debt payments.
Corporate quarterly reports typically focus on acquisitions, store openings, new products, and other measures that might indicate faster growth.
In times like these, a key element of corporate-speak is “balance-sheet health”- proving you have enough money to ride out the pandemic. In addition, look out for companies implementing rigorous cost-cutting front and centre.
Trading During Earnings Season
With earnings season on the horizon, traders who decide to stay active in the market despite the many risks and reasons why now isn’t the most prudent time to do so- should stay on their toes and be prepared to protect themselves as best they can.
There is not much else that impacts stocks like companies’ earnings reports. Even in regular times, because of the potential for relatively large price swings immediately following an earnings report, investor returns can be heavily influenced by how a company’s earnings report is received by the market.
In a nutshell, this potential for a stock to move by a large amount in a certain direction in response to an earnings report can create active trading opportunities.
With companies in nearly every sector announcing closures and furloughs, investors will be attempting to re-assess 2020 revenue and EPS prospects as they look to adjust their models.
Due to March’s severe global downturn, for many of Wall Street’s top companies’ earnings season is unlikely to be cause for much celebration. Nonetheless, for risk-seeking traders, at a time when market volatility has hit historic levels, the opportunities have never been greater.