Investors should expect a confusing earnings season ahead with delays and withdrawn forecasts

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 20, 2020.

Lucas Jackson | REUTERS

Heading into earnings season, investors should expect delayed reports, withdrawn forecasts and confusing results from U.S. businesses grappling with the coronavirus shutdown. 

There is a general consensus that company earnings are going to be ugly, with analysts expecting S&P 500 earnings growth to decline 5.2% in the first quarter, according to FactSet. This would mark the largest year-over-year decline in earnings reported by the index since the first quarter of 2016, when it declined 6.9%. 

This reversal in earnings growth projections from the start of the year comes amid an unprecedented time in financial markets, with a government mandated economic shutdown thanks to the fast-spreading coronavirus. Stocks have dropped violently into bear market in the past month, as businesses close their doors with no clear end in sight. The Dow Jones Industrial Average and S&P 500 closed out their worst first quarters on record on Tuesday. 

For the first quarter, 84 negative earnings preannouncements have been issued by S&P 500 corporations, according to Refinitiv. 

“We’re going to have an earnings season that’s anything but typical,” the Securities and Exchange Commission chairman Jay Clayton told CNBC on Monday. The SEC last week said it would give public companies an extension on delivering their earnings reports, so investors should expect delays. 

“These actions provide temporary, targeted relief to issuers, investment funds and investment advisers affected by COVID-19.  At the same time, we encourage public companies to provide current and forward-looking information to their investors,” said Clayton. 

Even with extra time, the earnings pictures will likely be unclear, with many companies opting to drop their full year outlook due to uncertainty from COVID-19. Companies such as Visa, Twitter, Target, Domino’s Pizza and Deere have already withdrawn their guidance for 2020. Quest Diagnostics, Gap, Square, Best Buy, Kohl’s, Yelp, FedEx, Ulta, Expedia, Southwest and United Airlines have taken the same actions. 

Lack of visibility 

“Visibility is extremely limited at this time,” UBS equity strategist Francois Trahan said in a note to clients on Wednesday. 

The disparity between analysts’ forecasts for price targets and earnings has not been this wide in 20 years, demonstrating how uncertain Wall Street is about the future, the firm noted. 

“Such a large range of opinions on the part of analysts covering the exact same stocks highlights the absolute lack of visibility. This could also be considered as a proxy of the confidence that analysts have in their earnings/price targets” Trahan expounded. 

UBS reduced its S&P 500 2020 earnings estimate to $140 per share from $170 per share.

Beyond Q1

First quarter earnings season is just the start of evidence of the pain inflicted by the coronavirus. 

Analysts have sharply reduced earnings estimates for the second quarter of 2020 over the past few weeks, with the S&P 500 projected to report its first double-digit decline in earnings, a fall of 10%, in a decade, according to FactSet. 

The S&P 500 earnings growth estimate for the entire 2020 calendar year has also turned negative in the face of the coronavirus pandemic. 

— with reporting from CNBC’s Michael Bloom. 

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