IVY INSIGHTS – EARNINGS SEASON WRAPPING UP – WHAT’S NEXT?
Commentary as of May 11, 2020
Dan Hanson: Earnings season is 90% complete with most large cap companies having reported. In total, 224 companies reported last week. Broadly, about one-third have not surprisingly suspended guidance. The tone from management is as weak as it has been in many years. Moving down the market capitalization spectrum, we anticipate the guidance could become even more challenged.
In our view, what we're seeing out of the S&P 500 Index is the best possible scenario. The question now is – what does the second half of 2020 hold? Company reports have been more about the commentary than the actual quarter. Technology led the way with narrowness in the market showing mega-cap technology leadership. Narrowness is typically about technicals, yet this time it was about the fundamentals. Two-thirds of earnings power for the market does appear to be healthy, predominately in the technology space. Companies are showing positive revenue or modestly negative results.
Essentially, we’ve seen a tale of two markets. In addition to technology, non-cyclicals and consumer staples have performed well. But below the surface is challenged performance as fundamentals for energy, consumer discretionary and industrials are in freefall.
We believe the market is acting rationally, and there are some places where active managers can pick their spots. Doing so isn't complex, but it also isn't easy – we must show discipline and stick to our knitting by having balanced and disciplined exposures.
Derek Hamilton: Data over the past week points to weakness in the second quarter that we were expecting. We witnessed a record fall in monthly employment as over 20 million jobs were lost in April, resulting in an unemployment rate of nearly 15%. However, the way the unemployment number is calculated actually understates the deterioration in the labor market. If you include the number of people that said they were employed but not currently working, the number would be closer to 20%. Notably, leisure & hospitality and retail made up about half of the decline in the number of jobs
Real-time activity data continues to point to a gradual recovery. Mobility trends from Google and Apple show people increasingly leaving their homes in the U.S. and Germany, with a steady rise in the number of people shopping and going to work. The number of small businesses that are open is down by roughly 35% from pre-virus levels, but that's compared to roughly 50% at the lows. Things are weak, but it looks as though the bottom is behind us in terms of activity. On an ongoing basis, we measure several indicators of stress in the financial system. Those numbers are much improved with these indicators falling back down to 2019 levels.
On the flip side, data from China shows stimulus continues to ramp up. Bank lending has been strong the last couple of months. Total aggregate lending in China which includes bank lending, other lending that occurs outside of the traditional banking channel and government bond issuance, is pointing to a pick-up in Chinese stimulus, which should help the Chinese and global economies over the next 6-12 months. Real-time activity data continues to move closer to normal. Additionally, the central bank continues to indicate further stimulus measures will likely follow.
The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.
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