by Bryan Perry

July 7, 2020

Despite the resurgence of coronavirus cases this past week, Wall Street applauded positive data on home sales, consumer confidence, and the labor market, even as Florida, Arizona, and Texas emerged as the new epicenters of the virus and put phase 3 reopening plans at risk. Restaurants, bars, and gyms were closed or had their reopening plans dialed back as confirmed cases and hospitalizations increased.

Optimism about the eventual end of Covid-19 seems to be permeating the social fabric as more videos show partakers not wearing masks and being shoulder-to-shoulder in an almost surreal state of social rebellion. Just as people are disregarding the risks of exposure, so too is the market ignoring what may be the worst earnings reporting season since 2008 – one that will certainly hospitalize many companies.

Estimated Price Per Share

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Very few firms issued any quarterly profit guidance in June. In fact, only 17 (3.4%) of the S&P 500 companies have done so, noted the Bank of America strategists who wrote a report last week. They stated that the data was “too sparse to analyze.” Over the last three months, the BofA data shows that 400 companies in the S&P 500 failed to provide guidance, a record going back to at least 2001.

The estimated second-quarter earnings decline for the S&P 500 is now a stunning -43.8%. If -43.8% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings reported by the index since the dismal Q4 2008 (-69.1%). (Source: FactSet – July 2, 2020)

change In Forward vs Change In Price

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Although July 4th denotes the nation’s day to celebrate its independence, the larger fireworks show for investors will commence July 14, when JPMorgan Chase (JPM), Citigroup Corp. (C), and Wells Fargo & Co (WFC) report earnings, followed by Goldman Sachs Group (GS), Bank of New York Mellon (BK), PNC Financial Services (PNC), and U.S. Bancorp (USB) on July 15, with Bank of America (BAC) and Morgan Stanley (MS) reporting on July 16. (I have no position in these stocks.) 

Navellier & Associates does not own JPMorgan Chase (JPM), Citigroup Corp. (C), Wells Fargo & Co (WFC) Goldman Sachs Group (GS), Bank of New York Mellon (BK), PNC Financial Services (PNC), U.S. Bancorp (USB) and Morgan Stanley (MS), in managed accounts but does own Bank of America (BAC).  Bryan Perry does not own JPMorgan Chase (JPM), Citigroup Corp. (C), and Wells Fargo & Co (WFC) Bank of America (BAC) Goldman Sachs Group (GS), Bank of New York Mellon (BK), PNC Financial Services (PNC), U.S. Bancorp (USB) and Morgan Stanley (MS),  in personal accounts.

I can’t remember the last time Wall Street was flying so blind going into an earnings season, led by the bank sector, where the opaqueness of what’s to come has been so thick. Most market pros will concede that a genuine extension of the bull market has to include the financials at some point, but, as I noted in last week’s MarketMail, the recent bank stress tests were long on reassurance and short on details.

I think Goldman Sachs and Morgan Stanley may surprise to the upside due to their trading profits, but not because of fundamentals. I also believe that the Fed tipped its hand with their downbeat FOMC policy statement on June 10 that sent the Dow lower by almost 2,000 points. Only the Nasdaq has recovered from that hit and has traded to a new all-time high – led by the mega-cap information technology sector.

The other 10 S&P sectors are all fighting to retake the high-ground from that nasty sell-off. Hopefully they will, on more bullish news about a forthcoming vaccine for the Covid-19 pandemic. Or maybe Congress will pass the CARES Act or the $1.5 trillion infrastructure bill, or extend the $600 per week federal unemployment checks beyond July 31 – or maybe all the above will come to pass.

In May, the Democratic-led House passed the Heroes Act, a sweeping $3 trillion stimulus package that included everything from more stimulus checks to an extension for the expanded unemployment program to more aid for the states. The Heroes Act has been largely ignored by the Republican-led Senate and is virtually guaranteed to fail in its current form.

Fiscal Fire Power

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, while the Fed has raised a red caution flag about the bank sector, which is exposed to a historic level of bad loans, there is probably enough additional firepower from the various branches of government to keep the market from buckling. Sour bank earnings will likely be thought of as a temporary condition that will be remedied when a legitimate timeline for a cure for the coronavirus becomes relevant.

The next few days that precede the parade of big bank earnings should be a good tell of whether the market has it right about whether broad central bank financial engineering and government stimulus will carry the day. Mr. Market has certainly priced in some earnings bombs and a lot of bad news in the junk bond market, but the extent of the damage is still very elusive. What the bulls are banking on is not the banks, but the Fed’s promise to pull out more shiny tools from its fiscal shed to keep the trend our friend.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
How to Inflate Away the COVID Debts

Sector Spotlight by Jason Bodner
How to Sign a Sweetheart Retirement Deal

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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