The first US earnings results came in published last week. As always, the major banks were first, showing disappointing results and withdrawing guidance for the second quarter. The consequence: analysts look into a black hole of uncertainty.
The largest bank in the United States, JP Morgan Chase, fell far short of meeting analyst expectations. In fact, it recorded its biggest deviation since 2009. Wells Fargo, Bank of America and Morgan Stanley also showed correspondingly disappointing results. Monday through Thursday the KBW Banks Index lost 14 percent of its value, ending the week with a loss of 8.7 percent.
Analysts point out that if companies in the consumer and industrial sectors show correspondingly weak profits, a new stock market correction is conceivable. For the time being, the major indices in the United States - S&P, Dow Jones and Nasdaq - are holding up very well. For example, the forward price-to-earnings ratio is back at the level of January, when the coronavirus outbreak was still limited to China.
Professional investors are looking at the healthcare sector, which is believed to benefit from the discovery of a coronavirus vaccine. They are hoping for new opportunities through what is called «mispricing».
Black hole
Others are skeptical. Strategist Lee Spelman of JPMorgan Asset Management said to the FT he went through many crises in his life, but never one in which the economy came to a standstill so abruptly, upending the outlook for profits and cash flows, just leaving a ‹black hole›, as most listed companies refrain from issuing forecasts for the second quarter. This comes are a contraction of the US economy of up to 40 percent is expected.
Analysts are currently mainly looking at companies› access to credit lines at their bank, and whether they are eligible for some of the $2,000 billion that the U.S. Federal Reserve and the government have made available, including for businesses. Analysts expect average earnings per share in the first quarter of this year to be 15 percent lower than in the same period last year and 10 percent on an annual basis, according to Refinitiv.
Loan provisions up 25%
For example, the first quarter results of the six US banks show that provisions on outstanding loans have increased to over USD 25 billion. Comparing these loan provisions with last year’s amounts is difficult though, because the regulator has changed the rules as of this year. Some analysts maintain a buy advice for US banks, because they think the sector has been penalised too much by the market.
But the S&P 500 is currently trading at 19 times the expected profit - which is on the high side, given the economic conditions in the US. Analysts also have doubts about the sustainability of the S&P›s recovery of around 30 percent from its low point on 23 March.
At the same time, analysts› earnings forecasts for the S&P have been revised downwards by 16%. Further adjustments have not been made for the time being because companies do not want to say anything about their revenue and profit forecasts, meaning it is unclear whether the market’s current pricing is anywhere close to being in line with reality.
Goldman: correction risk
Goldman Sachs warned last week that stocks have risen too fast and that there is a risk of a correction. At the same time, the merchant bank thinks that the bottom was reached on March 23rd. This is especially true if the expected V-shaped recovery of the economy takes place in the second half of the year.
Recently, more than 10 banks in the United States assumed a strong dip in the economy in the second quarter followed by a strong recovery in the third and fourth quarter. For 2020, Goldman predicts a contraction of the US economy of more than 6%.
Peter Oppenheimer, head of equity strategy at Goldman Sachs, says the discrepancy between the reaction of the markets and that of the economy and society - with 20 million unemployment claims in just 4 weeks - is mainly explained by the fact that the Federal Reserve has come up with an unprecedented aid package.
For the longer term, the bank is looking for winners with stable cashflows and solid balance sheets. According to Goldman, tech companies such as Amazon and Microsoft should be able to benefit from an accelerated shift to cloud applications by companies.