Brace Yourself for a Very Unusual Earnings Season

Yesterday, Florida reported a whopping 15,300 new coronavirus cases.

That’s more than many countries, and a record high for the state.

It’s also more new cases in a single day than New York ever reported during its catastrophic outbreak earlier this year.

Other states in the South, West, and Midwest are also reporting quickly spreading outbreaks of the virus.

The headlines about it practically write themselves, so Big Media are focusing heavily on this surge.

But the Reality Gap of the week is that despite the bad Covid-19 data, and the scary coverage of them, markets are hitting all-time highs of their own.

The tech-centric Nasdaq Composite index has closed at all-time highs several times over the past few weeks. In fact, as I’m writing this, it’s holding steady at a new intraday high, too.

Meanwhile, the Dow and S&P 500 both are less than 10% from hitting their all-time highs from before the COVID-19 crash in March.

This Reality Gap between coronavirus headlines and defiantly strong markets gets even starker when you consider the earnings season that’s kicking off this week. Wall Street consensus is that the earnings of S&P 500 companies will be down by a monstrous -44.6% compared to the same quarter last year.

That’d make this the worst quarter for earnings since the fourth quarter of 2008, when earnings fell by over -70% because of the Financial Crisis.

If you hold to the conventional view that stocks are valued at their discounted future cashflows, you’d expect the S&P 500 to also be down by -44.6%.

Instead, it’s down only 5% since before the COVID-19 outbreak.

Of course, it’s true that we’re seeing a very concerning surge in COVID-19 cases in several states, and that we have to be more careful to get this virus under control and keep it there.

But investors clearly don’t think things are as bad as the Big Media are hyping them up to be.

Part of the story is that stimulus is filling part of this Reality Gap. Another one is investors’ expectations.

Things are bad, sure. But they’re not terrible, at least not yet, so investors will be forgiving.

Look out for more on this later, because this dynamic is crucial to keep in mind while trading and investing this earnings season.

Speaking of which, we have some big names reporting this week to kick things off. Much like last earnings season, bad numbers alone will not sink a stock.

With two quarters of COVID-19 under their belt, investors know full well that most companies will be reporting bad numbers. Instead, they will judge businesses on what they see about the future.

In that sense, this will be a strange earnings season where stocks will move not based so much on the numbers they report, but on their qualitative views of the future.

And don’t expect to see much numbers-based guidance for the upcoming quarter. Many companies have already dropped guidance this year, and they’ll probably do it again.

First off, we have all the big banks reporting this week. JPMorgan Chase & Co. (JPM), usually the bellwether bank, as well as Wells Fargo & Co. (WFC), and Citigroup Inc. (C) all report tomorrow.

Goldman Sachs Group Inc. (GS) follows on Wednesday, while Bank of America Corp. (BAC) and Morgan Stanley (MS) report on Thursday.

Investors will be looking at whether all the fees the banks have collected from administering the Paycheck Protection Program and other government relief and stimulus programs will make up for the money lost from low interest rates, loan losses, and a slow economic recovery.

With investors still turning away from financial stocks, these banks will have to show something big to convince even today’s forgiving investors.

Tech-darling and work-from-home icon Netflix Inc. (NFLX) also reports on Thursday. Last time it reported earnings, Netflix was a sell-the-news candidate as the good report couldn’t live up to amazing expectations. It dipped for a couple of weeks before starting to climb again.

This time the stock is sitting at all-time highs. I expect the same thing short-term sell-the-news phenomenon will happen.

Bet on that temporary dip as a buying opportunity on a stock that just won’t go down for long…

Great trading, stay safe out there, and God bless you,

D. R.

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