• S&P 500 earnings set to decline by 10%, on average
  • Banks lead earnings season reporting sharp profit declines as they brace for loan losses
  • Companies are pulling back their 2020 forecasts due to uncertainty

The quarterly earnings season begins this week with roughly 40 S&P 500 companies expected to report results. This morning we heard from big banks including Goldman Sachs, Citigroup and Bank of America, which all reported sharp declines in earnings and big increases to their loan loss provisions as they prepare for waves of defaults.

Investors are already prepared for bad news and uncertainty due to the COVID-19 outbreak shutting down economies in March. All hope for a big turnaround this year after a weak showing in 2019 is gone. Analysts are expecting a 10% YOY earnings decline for the S&P 500 (see chart below), according to FactSet. If this turns out accurate, it would mark the largest decline in earnings reported by the index since Q3 2009 (-15.7%). LPL Research says even the -10% prediction may prove optimistic since some analysts have not adjusted numbers since mid-March in response to the lockdowns in many major cities throughout the country. In a new note, it noted the average earnings decline during recessions is 15-20%. 

LPL Research
Source: LPL Research.

The Energy, Consumer Discretionary and Industrials sectors will see the biggest declines in earnings according to estimates. Communication Services is expected to fare the best with a 7.8% gain and Facebook, reporting April 29, being the biggest contributor to growth. "We would expect some of the best performers this quarter to come from the communication services sector, which includes several leading 'stay-at-home stocks,'" said LPL Research. "Many consumer staples companies have benefited from shoppers stocking up. Healthcare spending is surging to combat the pandemic, which will help bolster the outlooks for certain companies in that sector. On the flip side, saying the quarter will be tough for energy producers is an understatement with crude prices having fallen more than 60% during the first quarter."

Investors will tear their focus away from the bleak picture of earnings to look for management guidance on how things may play out in different scenarios, clues on how the economy is faring, when the crisis is expected to end, updates on vaccine and drug developments etc. Banks especially can offer tremendous insight on the economy with the kind of customer data they have. Provisions for example can tell us how many borrowers are expected to default on existing loans. Shareholders will also want to hear if companies are cutting dividends and buybacks in order to reduce costs.

Despite the turmoil and rapidly changing circumstances, executives are expected to divulge freely this earnings season after the SEC assured firms that it wouldn't "second guess" good faith attempts to provide forward looking guidance. The regulator said it understands that this earnings season "will not be routine" since historical information is less relevant and has encouraged companies to provide as much information as they practically can about their current status and plans to address the effects of COVID-19, even if it's based on assumptions.