Will Earnings be the Market’s Wake-Up Call?
Markets continue to ignore signals.
Despite a global pandemic with no known vaccine or cure, as well as record unemployment, equity markets continue their upward trajectory. Will earnings season be a reckoning for markets?
The economic recovery — U-shaped, V-shaped, or something else — remains a mystery. Many investors and analysts hope earnings will provide some insight into what the recovery will look like.
What insight will earnings provide?
A sign of a company’s financial health, earnings indicate how much money a company makes, and whether that company will be profitable and successful in the longer term.
A majority of publicly traded companies will release results during the next few weeks. While earnings announcements will certainly drive markets, what will the numbers tell us?
Loan loss provisions skyrocket
Bank earnings are being watched as an indication of the nation’s health, given their exposure to all parts of the economy. Despite earnings news out of the banking sector indicating major loan loss provisions, the S&P 500 Financials subsector actually rose 0.70% the day earnings were released for three of the nation’s major banks.
Of the major U.S. banks, JPMorgan Chase posted a 51% profit loss from a year earlier, Wells Fargo announced its first loss in a decade, and Citigroup’s profit fell 73%. Helped by trading revenue, Goldman Sachs held its quarterly profit steady from a year ago.
Wave of defaults
While some firms are reinventing themselves, many will never be able to reopen, including businesses without deep pockets. How much of an impact will that have on the economy?
According to the U.S. Small Business Administration, approximately half of U.S. workers are employed by small businesses (defined as those that employ fewer than 500 employees). And those businesses bore the brunt of the unemployment caused by the pandemic between March and April. It’s unclear whether additional stimulus will be enough to help these businesses survive.
Concentrated rally
Despite the market’s gains, winners are still concentrated in just a few sectors. The majority of S&P sectors remain in the red for the year-to-date period.
The FAANGM stocks— Facebook, Apple, Netflix, Amazon, Alphabet (Google) and Microsoft — have continued to outperform. The market capitalization of these companies is currently over 25% of the index, and as shown below, these stocks have strongly outperformed the broader market.
FAANGM Share Prices vs the S&P 500
With a resurgence of COVID-19 cases appearing across the United States, social restrictions are once again being imposed. Further complicating the employment issue is whether schools will reopen, and how employees can contend with a return to work if their children are not at school. With the U.S. presidential election on the horizon, will markets continue to ignore the signals ahead?
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more, visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
