A Bad Earnings Season Is Coming to the Stock Market. Brace Yourself.

Photograph by Johannes Eisele/AFP via Getty Images

Social distancing and other efforts to slow the spread of the novel coronavirus in countries around the world are effectively slamming the brakes on the global economy. The impact on companies’ earnings in coming quarters will undoubtedly be negative, but quantifying just how bad it will get is exceedingly difficult at this stage. Investors clearly fear the worst, having sent U.S. stock indexes down by almost a third over just the past month.

First-quarter results may be mixed depending on the industry, as many of the canceled events, bans on travel, and tumbling consumer activity outside of China didn’t kick in until mid-March. Airlines, hotels, and other transportation and leisure companies are already facing intense pressure. But grocery stores and consumer goods companies may report a blockbuster March, as people rushed to stock up on food and supplies.

But that’s likely more than priced in. Kroger (ticker: KR) and Clorox (CLX) are among the best-performing stocks during the market’s recent meltdown. Even Walmart stock (WMT) hit an all-time high on Wednesday.

For the S&P 500 more broadly, first-quarter consensus earnings estimates are down 4.1% since late January, when coronavirus news began to pick up. They now imply a 1.3% year-over-year decline in S&P 500 earnings per share in the first quarter, according to Yardeni Research.

Managements’ forward guidance and commentary about the second quarter and the rest of 2020 will clearly be more important—and potentially much uglier.

The consensus has been for S&P 500 earnings per share to be 2.7% higher in the second quarter of 2020 than they were in the same period in 2019, per Yardeni. That’s highly unlikely as things appear today.

For all of 2020, analysts on aggregate still see 6.1% growth for S&P 500 earnings per share, with their average forecast down just 2.3% since late January.

Analysts might be waiting to hear from companies directly before adjusting their forecasts. According to Credit Suisse’s chief U.S. equity strategist, Jonathan Golub, only 15% of Wall Street analysts have changed their estimates since the start of last week. Those that have see an 0.7% drop in 2020 S&P 500 earnings per share on average.

“As the estimate cuts continue to ramp up in the coming weeks, those growth forecasts will turn negative too,” wrote economist Ed Yardeni, who is president of Yardeni Research, on Wednesday. “The question is whether the same can be said for Q3 and Q4.”

If the coronavirus outbreak is under control by the second half of the year and life and economic activity is allowed to resume, many companies could see a rebound in their business that makes up for some of the losses in the second quarter.

Apple (AAPL) may be losing out on iPhone sales while its stores are currently closed, but a shopper may simply buy the same device once they reopen. For airlines, restaurants, and many other businesses, the catch-up effect won’t be nearly as strong. Coffee-drinkers won’t buy two Starbucks (SBUX) lattés a day in June and July to make up for the ones they missed in April and May. Many energy companies will suffer unless the price of oil rebounds strongly.

And there is always the still-unknowable possibility that the coronavirus impact lasts well into late 2020.

Evercore macro research analyst Dennis DeBusschere likewise expects a steady stream of downward revisions to earnings-per-share estimates in the coming weeks. He notes that even if S&P 500 revenues remain flat over the full year, per-share per share can still fall significantly.

For starters, profit margins are likely to contract as one-off expenses rise and productivity falls across the economy. Many companies are taking steps to support employees, which will also dent margins.

“Some mega-cap corporations are committing to paying employees as if business was operating as usual [such as Apple, Walmart, or Amazon.com (AMZN)],” DeBusschere wrote on Tuesday. “Those policies, while a welcome support for individuals and spending in the broader economy, will be a significant drag on profitability.”

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Plus, many companies eager to conserve cash are pausing their stock-buyback programs. That means share counts will decrease less than currently forecast, and earnings-per-share growth estimates will come down even more.

And the most economically sensitive cyclical companies will feel the greatest burden from the coronavirus disruption. Those firms were both the largest contributors to earnings growth and the greatest contributors to buybacks in the S&P 500.

The rapid tumble in U.S. stocks has made a wide swath of the market suddenly appear attractive on a price-to-forward-earnings multiple basis. But take those ratios with a grain of salt. Analysts still have much catching up to do.

First-quarter earnings season kicks off in mid-April with major banks reporting first, as usual. The results will be even more telling than usual.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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