Investors have gone from betting on another round of trillion-dollar stimulus spending, to hoping a Democratic sweep in November will remove any uncertainty about the election, to worrying about yet another upward trend in COVID-19 cases in the United States and Europe.
Now, something far more mundane could help drive stock prices: earnings season.
The roughly one-month period, which brings a flurry of financial results from public companies, is upon us. It’ll be a chance to see how corporate bottom lines have been affected by the still uncontrolled pandemic.
Analysts are predicting that the companies in the S&P 500 will report a decline in profits of about 20% for the three months through September, compared with the same period last year. That would be ugly.
But it would be an improvement from the 32% tumble that profits took during the second quarter, which was one of the worst quarters for earnings since 2009, when the United States was suffering a deep recession.
The numbers in earnings reports are always an estimation game on Wall Street, with results graded on a curve compared with the expectations that investors and analysts hold.
So when expectations are deeply negative, a not-as-bad result can fuel stock market gains. In the last reporting season, which got underway in July, a record number of companies did better than expected. That lifted the stock market to a high, even as a fresh coronavirus wave was slamming the economy.
The S&P 500 rose 5.5% in July and 7% in August, hitting its highest point in early September.
A similar less-bad-is-good dynamic could be in store for investors over the next few weeks. Wall Street banks reported their results last week, and they were much better than expected. (On the other hand, airlines Delta and United posted disappointing numbers, even when factoring in the already diminished expectations because of COVID-19.)
This week, the pace of reporting will pick up, with companies like Netflix, Procter & Gamble, Verizon, AT&T and Intel scheduled to release results. Analysts will scour that news for clues about economically important issues, such as whether further cost-cutting plans are coming down the pike, potentially weighing on economic growth.
Right now the predictions are that companies in industries that are sensitive to short-term economic swings, including industrial equipment companies and airlines, will produce the worst results over the next few weeks. While those in industries such as health care, consumer staples and technology — relatively insulated from the vicissitudes of the COVID economy — will fare better.
Either way, don’t expect corporate chiefs to be too chatty about the outlook for the future, given the scale of the uncertainty.
“Most managements will still be reluctant to provide forward earnings guidance,” Goldman Sachs analysts wrote in a preview last week of the next few weeks of results. “The uncertain timeline of a vaccine that is essential for the normalization of the economy, the stalled talks between the Trump administration and Congress on an interim fiscal package, and the contentious election that is only 25 days away are all valid reasons for executives to minimize forward-looking commentary.”
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