The recent rise in global stocks has taken many analyst by surprise given the scale and size of lockdowns due to the COVID-19 pandemic. The MSCI All-Country World Index has risen ~40% from the lows of March. This rally has also taken many investors by surprise with many expecting fresh lows rather than moving back up towards pre-Covid highs. The Nasdaq has even been printing fresh highs recently too. The ‘stay at home stock’s like Amazon and Netflix have enjoyed the shutdown season as their earnings are projected to remain relatively unhindered by COVID-19. Other tech companies are thought to be growing through this crisis as the process of digitalisation is accelerated.
Earnings to change stock’s fortune?
The concern for some time has been that many companies’ earnings will be reduced going forward. Just how bad could it be? In Germany, according to a recent IFO study, >20% of all German companies are concerned about the possibility of going bankrupt. Many sectors in the service industry are most at risk not just in Germany, but also globally. Travel agencies, restaurants, hotels, creative jobs, and airlines are all at high risk of collapsing with the falling demand. Especially if the recent reports about airborne droplets spreading COVID-19 are confirmed as a widespread phenomena. The bottom line is that it still remains to be seen whether consumption returns to pre-Covid-19 levels. Also, with rising global COVID-19 cases, the risks of further lockdowns have also increased which once again hinder demand.
When are earnings due?
The majority of Q2 earnings will come in the last week of July and the first week of August. This is when more than 50% of all the global members are due to report. However, the early earnings releases will set the mood music. Looking at the Bloomberg chart below you can see that recent estimates for earnings have bottomed. However, be aware that is really due to 80% of all US companies refusing to provide guidance over the last three months. Times were too uncertain to provide meaningful guidance See below:
The risk that investors need to be aware of here is that Q2 earnings collapse and that will bring down global stocks. However, also bear in mind that the market has continually been rallying higher ignoring rising COVID-19 cases and showing a bias to the upside supported by the Fed and global fiscal stimulus. Let’s see what earnings seasons bring to recent stock prices in the next few weeks.