Looking at Earnings, So Far, Things Don’t Look That Good

Shah Gilani May 18, 2020

Can we talk, about earnings? Let’s.

But, first, listen to what Randall W. Forsyth said to open his column titled Up and Down Wall Street this Saturday in Barron’s. He said, “The good news is the bad news can’t get worse.”

Sadly, it can. That includes earnings.

With more than 90% of S&P 500 companies reporting last week, quarterly earnings look like they’ll be down 13.8% from Q1 2019.

Maybe that’s why markets sold off last week.

The Dow lost 645.90 points on the week, closing down 2.7% at 23,685.42. The S&P 500 closed the week down 2.3%, its worst week since March 20. And the Nasdaq composite closed the week down 1.2%.

What’s interesting, in hindsight, which I’ll get to in a second, is that the Dow dropped 1,083.32 over the first three days of the week, closing Wednesday at 23,247.97, down 516.81, or 2.17% that day.

The hindsight here comes to us courtesy of Sunday’s 60 Minutes show. The big-deal guest interview yesterday was with Jerome Powell, Chairman of the Federal Reserve. Only, Jerome wasn’t on live yesterday. The show was taped from the Fed’s Washington D.C. headquarters on Wednesday, after the Dow dropped more than 1,000 points over the first three days of trading last week.

It’s not normal for the Fed chairman to grant an interview to 60 Minutes, especially in the middle of a crisis. Did the Chairman offer 60 Minutes the interview? Maybe. Because if markets were to continue getting hit Thursday and Friday, they’d be in bad shape come Monday morning, today, and a further route would be entirely possible.

So, why not tee-up an interview on Wednesday to hedge your bets come Monday.

The markets did. Did they know Powell was talking to 60 Minutes? Some traders did, maybe that’s why we rallied Thursday and Friday.

Because, of course, Chairman Powell is going to be reassuring on TV. And he was. He said, there was “no limit to what we can do with these lending programs.” In other words, more free money is coming to support markets and the economy and the unemployed and whomever needs the Fed’s shoulder to cry on and back to carry them.

So, now you know why futures were up HUGE this morning.


We’ll see how today goes, how the week goes and whether we can get above some important resistant levels that capped markets before.

For the Dow, that resistance is 24,250, for the S&P it’s 2,939. And for the Nasdaq it’s 9,250 then 9,343.

With Q1 earnings soon to be in the rearview mirror, it’s important to gauge the market’s “value” now and how investors might value it the rest of the year.

Let’s look at the S&P 500.

First, we’ll take Q1 earnings, and assume they’ll end down 13.8% year over year. Q1 earnings in 2019 were $39.15 (for all 500 stocks). Minus 13.8% means Q1 2020 earnings will add up to $33.74.

Analysts are now, based on what they got out of CEOs and CFOs and earnings reports so far, estimating Q2 earnings will be down 41.9% from what they were Q2 2019. That’s $24 as opposed to $41.31. Q3 is estimated to come in 23.8% lower, totaling $32.11 as opposed to $42.14 in 2019. And in Q4, analysts expect earnings to come in 11.6% lower, making them $37.69 as opposed to last year’s $42.

At the end of 2019, the S&P 500 closing at 3,230.78 against 12-month trailing earnings netted a price earnings multiple of 19.62 (12-months earnings $164.66 x 19.62 PE = 3,230).

If the S&P nets earnings of $126.97 (analysts estimate) in all of 2020, at its Friday close of 2863.70, its PE is 22.55. It’s about to get a lot richer today.

If the S&P 500 ends 2020 with earnings totaling $126.97 and it’s PE was 20, it would end the year at 2539.40. That’s 11% lower than where we closed Friday.

Let’s hope earnings aren’t as bad as analysts estimate. Or, that investors are willing to place a much higher value on those earnings.

Or, that Jerome Powell is really the Wizard of Oz.

Enjoy today and let’s hope the hoped-for good news on the virus is really what’s behind the rally triggered today.

Watch those resistance levels. Above them we’re good. We can even see another leg up.

If we can’t get above them and stay above them, be careful out there.


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