Stock Market Comment: What to look at in Q1 earnings reports?

• Wall Street Q1 2020 earnings season starts next week

• Big banks and airlines among the first to report

• CapEx, dividend and buyback plans in the spotlight

• More than half of S&P 500 companies will report earnings by the end of April

• US500 trades in "bull market" territory

Equities in the United States as well as other parts of the world had a very poor first quarter of 2020. Coronavirus-related sell-off pushed most of the major indices into bear market territory. Markets recovered slightly but now they will face a big test - earnings season for Q1 2020. Wall Street earnings season will begin next week with first major banks reporting results on Tuesday, April 14. Companies from the S&P 500 index are expected to report 7.3% YoY decline in EPS and revenue growth of 1.5% YoY. 

S&P 500 (US500) jumped over 20% since mid-March low and is considered trading in "bull market" territory. Earnings season will offer some insight into the damage Covid-19 outbreak has done and will be a test to current optimism. Note that the index reacted to Fibonacci retracements during the ongoing rebound therefore 50% retracement at around 2,800 pts could be the next major resistance. Source: xStation5

Earnings and sales? Not really important

While this may sound strange, earnings and sales data is actually the least important part of the upcoming earnings season. Why? Because it is completely irrelevant to the current situation. Keep in mind that lockdown measures in the United States were not in place until March. Reports will be blurry as they will capture 2 months of more or less "normal" operations and a month of virus-disturbed operations. Apart from that, analysts also have trouble forecasting performance of companies. Earnings estimates have been lowered throughout the quarter and still may not capture the reality. Having said that, whether the company misses or beats in terms of earnings or sales may not matter too much. 

According to FactSet data, the EPS estimate for S&P 500 index dropped 9% since the start of 2020. However, it should be noted that not all analysts made revisions to their previous forecasts therefore median estimate may be far off the reality. Source: FactSet

Watch out for guidance!

So what will matter this earnings season? Guidance! While it is still uncertain when and whether restrictions in the United States will be lifted, executives may use experience from March and try to provide investors with guidance for the future quarters. There are issues over which the company has control and investors should focus on what the company has to say about these - buybacks, dividends, employment and investments. Cuts to planned CapEx are likely to be especially visible in the energy sector as low oil prices and prospect of forced output cuts makes further investments into capacity unreasonable. Job cuts are likely to be seen all across the economy but the biggest should be present in firms that find it hard for employees to work from home or have suffered from a near-freeze in activity, like carmakers or airlines.

Focus on dividend announcements

However, it will be the company's outlook on profit distribution that will likely have the biggest impact on stock prices. When it comes to corporate actions, buybacks will be the first victim of the coronavirus outbreak. US companies were pumping billions into the stock market in recent years by purchasing their own shares with surplus cash but this is likely to end as companies will prioritize liquidity in the coming quarters. Story looks a bit different for dividends as companies are aware how much they mean to investors and sometimes prefer to finance it with debt rather than let shareholders be disappointed. Having said that, only companies that have fallen into real trouble may slash dividends (i.e. energy sector) while others will try to, at least, hold them unchanged. Summing up, cut to buybacks may not be too informative but dividend cut or suspension will be a big warning signal.

Nominal value of buybacks and dividends declined in the aftermath of the global financial crisis. However, relative decline in buybacks was much greater than in case of dividends. Moreover, dividends did not drop until late-2008 while buybacks started to decline in mid-2007. Source: Macrobond, XTB Research

Calendar - what's to come?

More than a half of the companies included in the Russell 1000, index grouping 1000 biggest US companies, will have reported their results by the end of April. This includes 23 Dow Jones, 58 Nasdaq and 284 S&P 500 members. Below we provide you with a calendar of key releases for the first two weeks of the season.

As a word of caution it should be said that SEC Chairman, Jay Clayton, said that the Commission will allow for delays in release of some reports. Having said that, times and dates included in the calendar below may be subject to change.

While first reports from big US banks are considered a start of the earnings season, some companies report earnings before them. One such report of note is scheduled for Monday, April 13 - Delta Air Lines (DAL.US). The report will be one of the first to show an impact of Covid-19 pandemic on US airlines. Source: Bloomberg, XTB Research