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MARK-TO-MARKET: Corporate earnings reflect COVID-19 fallout
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MARK-TO-MARKET: Corporate earnings reflect COVID-19 fallout

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And so it begins.

Corporate earnings season is the roughly six-week time period when the majority of U.S. corporations release their financial results for the prior quarter. In most cases, this will be the April-June second quarter.

Last week, earnings season formally kicked into high gear with the earnings reports from major financial industry bellwethers such as JPMorgan Chase, Citigroup, Wells Fargo and PNC Financial Services Group. Over the next few weeks, the rest of America’s corporate heavyweights will release their quarterly earnings.

The primary factor of a company’s stock price is its ability to generate revenues and profits from the sale of its goods and services. And during corporate earnings season, each company’s earnings (profits), sales and revenues — as well as its future outlook — will be painstakingly dissected to justify the current price of the company’s stock.

But the COVID-19 pandemic is expected to batter corporate profits throughout 2020. With government-imposed mandates and business closures being initiated in March, the April-June second quarter faced the brunt of the economic fallout from the virus. Economic growth, the labor market, consumer spending, foreign trade and most every aspect of the American economy has been negatively impacted.

According to data by Refinitiv, in the second quarter, corporate earnings for companies in the S&P 500 are expected to decline by 43.1% from the second quarter of 2019. The S&P 500 is the benchmark stock index comprised of the 500 largest U.S. corporations. This would be the largest decline since earnings fell by 67% in the fourth quarter of 2008, at the height of the global financial crisis. Second-quarter revenues are also expected to fall by 11.7%. In the first quarter, corporate earnings and revenues fell by 12.8% and 1.4%, respectively.

Of the 11 sectors within the economy, none are expected to report earnings growth in the second quarter. The utility and technology sectors are projected to fare the best, with estimated earnings declines of 2.3% and 8%, respectively. The energy sector is expected to perform the worst, with earnings projected to fall by 153.7%. Reduced global demand for crude oil from weaker economic growth —coupled with an existing oversupply — have sent the price of crude oil, along with profits, plummeting for energy producers in recent months.

Corporate earnings and revenues are expected to improve in the second half of the year but aren’t projected to return to positive growth until early 2021.

Without question, corporate earnings will take a substantial beating in the second quarter. Corporations know that, and so does Wall Street. Instead, the focus will be on each company’s forward guidance — its future outlook on earnings and revenues for the rest of the year. The worst of the COVID-19 fallout was in April. In May and June, the economy and labor market made surprising rebounds. Each corporation’s insight on the sustainability of this rebound will be front-and-center on Wall Street’s radar. Understandably, this quarter’s corporate earnings season will be less about the past and more about the future.

Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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