Q2 Earnings Season: Expectations Worst since the Financial Crisis

The COVID-19 virus became known to the world in January and it started spreading around the globe later in the first quarter. By the time the second quarter started the virus had spread to Europe and North America with many countries being forced to limit social interactions. Many parts of the United States issued stay at home orders for non-essential workers and this took a tremendous toll on economic activity.

The lockdown orders were primarily in effect during the second quarter. Now we are seeing states reopen and the virus has started to surge again. This has led to some states backtracking or pausing reopening plans. For corporate America, we are getting ready to get the earnings results for the second quarter and the expectations are pretty abysmal.

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The four largest banks in the U.S., in terms of total assets, will get things started next week. Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Wells Fargo (NYSE: WFC) are all set to report before the opening bell on Tuesday. Bank of America (NYSE: BAC) will report before the open on Thursday.

I put together a table with these four stocks to show just how bad the results are expected to be. I took the current EPS estimate and compared it to where the EPS estimate was 90 days ago. I then compared the estimate to the actual results from Q2 2019. As you can see, expectations are really, really low.

Bank of America has seen the smallest change to the EPS estimate with the consensus being lowered by 43.4%. It also shows the smallest percentage decline compared to last year at 59.5%. JPMorgan Chase shows the second smallest declines with the estimate dropping 44.6% and this year is lower by 60.3%.

Citigroup’s estimate has been lowered by 68.7% in the last 90 days and the estimate is 76.4% below last year’s results. Expectations for Wells Fargo are the worst as the company has struggled in recent years. The estimate for Wells has been cut by 91.9% in the last three months and the estimate is 95.4% below last year’s results.

The pessimistic outlook isn’t contained to just banks. According to Lipper Alpha’s Insight and I/B/E/S data from Refinitiv, earnings for the S&P member companies are expected to decline by 43.1% compared to last year. If you exclude the energy sector the numbers improve a little, but they are still expected to decline by 37.8%.

All 11 sectors are expected to show declines, but the level of the declines varies greatly. The utilities sector shows the smallest expected decline at 2.5%. If we break things down into smaller subsectors, gas utilities are expected to see an increase in earnings of 11.6%.

The technology sector is expected to see earnings decline by 8% and that is the second smallest decline. Looking at specific subsectors, application software companies are expected to see earnings grow by 26.9% and chip equipment companies are expected to see earnings growth of 23.6%. If these two subsectors are removed from the overall tech outlook, the expected decline moves to 10.3%.

The energy sector is by far the worst in terms of the expected earnings decline. As a whole, the sector is expected to a decline in earnings of 153.4%. There are five subsectors in the energy sector and all five are expected to decline sharply. The worst subsector is integrated oil & gas which is expected to see earnings drop by 180.9%.

Revenues are also expected to decline for the quarter. For the S&P as a whole, revenue results are expected to drop by 11.7%. If we exclude the worst sector, once again energy, the expected decline drops to 8.5%.

During the course of the economic shutdown and the reopening, many experts have talked about a V-shaped recovery for the economy. Looking out to the third quarter earnings expectations, that doesn’t appear as likely. For S&P 500 members, earnings are expected to show a decline of 24.9% in Q3 when compared to Q3 2019. Only one sector is expected to show an increase and that’s the utilities sector with growth of 0.2% – not exactly awe-inspiring results.

With cases increasing in 28 states the virus isn’t going away anytime soon. Some experts are saying the current spikes are simply a spread in the first wave and that a second wave is fully expected. Some areas are already having to reinstate restricted business practices, so to think that the economy is just going to bounce right back in the second half of the year is ridiculous.

My advice to investors is to be careful and diligent.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.