The S&P 500 index is set to suffer the worst quarter for earnings since the 2008 financial crisis, and it’s likely to get a lot worse because the results due this week will barely show the impact of the COVID-19 pandemic.
About 13% of S&P 500 /zigman2/quotes/210599714/realtime SPX +0.74% companies reported earnings through Tuesday morning and after the first official week of 2020 first-quarter results earnings are on track to decline 14.4% from a year ago, according to FactSet. That would be the biggest decline since the 15.7% plunge in the third quarter of 2009.
Those projections are based on blended estimates compiled by FactSet, which include actual results and consensus analyst estimates of companies that haven’t reported yet.
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The bad news is that actual results have been a lot worse than expected so far, as earnings for the 66 companies that have already reported dropped 28.2%, according to FactSet.
Companies have thus far missed earnings-per-share expectations in aggregate by 5.5%, according to Credit Suisse chief U.S. equity strategist Jonathan Golub, although more than 80% of the companies that have reported results have beat expectations. Over the past three years, EPS has beat in aggregate by 5.2% on average.
The worst is yet to come.
The energy and consumer-discretionary sectors are expected to suffer the biggest profit declines, but only two of 27 energy companies and six of 62 consumer discretionary companies have already posted numbers. Energy earnings are projected to decline 67.1% and consumer discretionary earnings are expected to fall 36.4%.
Although many were already prepared for an “ugly” quarter because of the coronavirus outbreak, Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank, suggested the results won’t even show the half of it.
“[B]ecause the COVID-19 pandemic wasn’t taken seriously until early March, less than a third of the quarter was impacted by various lockdown orders across the globe,” Hoedt said.
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As an example, Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.66% component Coca-Cola Inc. /zigman2/quotes/209159848/composite KO -0.06% reported Tuesday first-quarter earnings that beat expectations. But the beverage giant said unit case volume was growing at a 3% clip through February, but ended up being down 1% on the quarter, given the weakness in March. And so far in April, volumes have dropped 25%.
And fellow Dow components International Business Machines Corp.’s /zigman2/quotes/203856914/composite IBM -0.90% Chief Financial Officer James Kavanaugh said as the tech giant reported first-quarter results late Monday, that results were “tracking roughly in line” with expectations through February. “As we got into March, the health situation and resulting social distancing became more widespread,” Kavanaugh said. “As you would expect, we saw noticeable change in client priorities.”
S&P 500 consumer discretionary component Best Buy Co. Inc. /zigman2/quotes/205918291/composite BBY +1.92% said last week that quarter-to-date sales through March 20 were up about 4% from the year-ago period and above expectations, but sales plummeted 30% from March 21 through April 11 after stores were closed to customer traffic.
For oil services company Hallburton Co. /zigman2/quotes/210488727/composite HAL +3.52% , which reported results on Monday, Chief Executive Jeff Miller said the industry was facing the “dual shock” of a massive drop in oil demand as a result of the COVID-19 pandemic and oversupply. “Consequently, we expect activity in North America land to sharply decline during the second quarter and remain depressed through year-end, impacting all basins,” Miller said.
The grim results expected for the first quarter could pale in comparison to what the second quarter likely holds.
Analysts expect a 29.8% decline in second-quarter profits, a wide valley away from their projections for a 5.7% rise as of Dec. 31. This would mark the biggest decline since the first quarter of 2009, when earnings dropped 41.1%, according to FactSet.
In total, this week brings earnings for more than 70 members of the S&P 500 and six Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.66% components.
Netflix Inc. /zigman2/quotes/202353025/composite NFLX +0.86% will show whether global lockdowns have helped drive a rush of new subscribers when the company posts Tuesday afternoon, after hitting record stock prices in anticipation.