Earnings Season Will Help Illustrate the Impact of COVID-19 on Various Sectors
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 4/17/2020. Rates and Economic Calendar Data from Bloomberg as of 4/17/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets posted a second consecutive week of gains. Sentiment was lifted by reported progress on a treatment for the coronavirus as well as the potential for the easing of lockdown restrictions across the world. In the U.S., the S&P 500 Index rose to a level of 2,875, representing a 3.06% gain for the week while the Russell Midcap Index advanced 0.96%. Small-cap companies, which are often more sensitive to economic growth rates, were the exception to last week’s rally evidenced by the Russell 2000 Index returning -1.40% over the week. On the international equities front, both developed and emerging markets also finished in the green, returning 0.98% and 1.58%, respectively. Finally, the 10-year U.S. Treasury yield settled in at 0.65% to end the week.
Earnings will remain in focus this week, with nearly 20% of S&P 500 companies scheduled to report first-quarter 2020 results. We understand that forward guidance, which is a major driver of valuations, is highly unreliable during our current quandary and that the pronounced dispersion in company earnings estimates from analysts indicates a high level of uncertainty and weak visibility. However, keeping a keen eye on actual results in the first quarter will be important when preparing for the coming months of continued market and economic turbulence. We expect earnings revisions to continue at the current negative rate until more information surfaces and companies can get a better handle on operations.
Drilling down into sector-specific insights, industry earnings will vary greatly. Financials, banks specifically, kicked off this earnings season with significant quarterly losses. Some of the biggest banks reported greater than 40% drops in earnings. Market volatility helped some firm’s trading divisions, however, the necessary buildup of reserves set aside for potential, future loan defaults took a toll on many of their bottom lines. Energy companies will also feel the pain, which should come as no surprise due to the historic drop in oil prices driven by oversupply and a slash in demand. In fact, certain crude oil futures contracts even dipped below $0/barrel on Monday. Finally, Industrials are also set to disappoint. To provide a better picture of the sector, we can break it down further into Transportation, Capital Goods, and Commercial & Professional Services. All areas have been significantly influenced by coronavirus related disruption.
On the other hand, expect Information Technology and Communication Services to be among the leaders this earnings season on a relative basis. These two sectors, in particular, may have varying results within the category (consider a hardware company hurt by a supply disruption while a software company may be experiencing increased demand) but on the aggregate should fare relatively well. In addition, some of the more defensive sectors such as Health Care and Utilities are likely to fall into the leader’s category.
So where do we go from here? Positive drug/vaccine developments and the eventual, gradual “re-opening” of America will help lift sentiment. Still, it’s important not to look past the facts and not to underestimate the historic economic blow the coronavirus has dealt to the global economy. We continue to favor quality companies, those that exhibit stable and robust balance sheets absent of excessive leverage, a consistent track record of increased and growing profitability, and a skillful and experienced management team in place to help weather the storm. In addition, keeping some cyclical exposure in quality companies may help portfolios participate in the upside once the market does stabilize and the days of whipsaw volatility are reduced.
It is also important to remember that history shows us that time in the market has a bigger impact on long-term performance than trying to time the market successfully. In this regard, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
Disclosure: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
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