Video Update: Just How Bad Are Q2 Earnings So Far?
This is John Persinos, with a video update for Tuesday, July 28, 2020. The article below this video expands in greater detail upon the topic.
Corporate earnings results cut through the white noise and disinformation. They’re the ultimate reality check. This week, corporate earnings season occupies center stage, with about 40% of S&P 500 companies posting second-quarter results.
During the coronavirus crisis, what’s the overall state of corporate profitability? Not so great. Sharply negative earnings growth combined with inflated asset prices create a recipe for future market disaster. However, at the bottom of this article, I steer you in the direction of an investing system that reaps profits in good times or bad. First, let’s look at the earnings picture and how it’s driving the markets.
As of this writing Tuesday morning, the three main U.S. stock market indices were trading deeply in the red, as new coronavirus stimulus legislation stalled on Capitol Hill and bellwether Dow components posted disappointing second-quarter earnings.
To date, roughly 26% of the companies in the S&P 500 have reported actual earnings results for Q2. According to research firm FactSet, the blended year-over-year earnings decline for the S&P 500 for Q2 is -42.4%. Blended combines actual results for companies that have reported and estimated results for companies that have yet to report.
The figure of -42.4% is smaller than last week’s blended earnings decline of -44.1%. Positive earnings surprises reported by large-cap technology stocks are largely responsible for the improved performance.
The blended revenue decline (to date) for the second quarter is -10.1%, which is smaller than the revenue decline of -10.4% last week. Once again, technology is providing a lift. Positive revenue surprises reported by companies in the tech sector are mostly responsible for the decrease in the overall revenue decline.
Despite sputtering revenue and earnings growth, stocks are pricey. The forward 12-month price-to-earnings ratio for the S&P 500 is 22.3, which exceeds the 5-year average (16.9) and the 10-year average (15.2).
Due to COVID-19 uncertainties, many companies are withdrawing earnings guidance. The pandemic has rendered useless many conventional financial metrics. More S&P 500 companies are not providing annual earnings per share (EPS) guidance (32) than providing annual EPS guidance (28) at this point in time in the Q2 earnings season.
In aggregate, among the companies in the S&P 500 that have reported earnings for the second quarter, 81% have reported actual EPS above the mean estimate, 2% have reported actual EPS equal to the mean, and 17% have reported actual EPS below the mean. Technology companies have been the biggest overperformers.
Silicon Valley shines through…
The shares of “Big Tech” have provided a major impetus for the market rally since late March, as investors look toward a post-COVID world in which tech firms achieve even greater dominance.
The tech-heavy NASDAQ composite has rebounded to the greatest degree among the major benchmarks this year. The tech sector has enjoyed a tailwind as technology brand names post better-than-expected second-quarter earnings and revenue.
Remote teleconferencing, cashless payments systems, virtual reality, and a host of other applications that are indispensable tools during quarantine will become even more entrenched when this virus is finally behind us.
Technology is among the few industries actually doing well during the coronavirus outbreak, with prosperity concentrated among a handful of giants. A snapshot of the NASDAQ 100 reveals that only six tech behemoths make up nearly half of the entire market cap for the index (see infographic below).
Compared to the other major indices such as the Dow Jones Industrial Average, S&P 500, and NASDAQ composite, “The One Hundred” collectively have risen 500% compared to their value a decade ago.
These 100 companies also exert a disproportionate influence over the NASDAQ composite, which is comprised of 2,700 companies. The six tech companies in the graphic make up nearly 41% of the larger composite’s entire market cap.
Big Tech is poised to reap the spoils of a new economy that’s being born during quarantine. Problem is, these stocks are now overpriced and vulnerable to a tumble. In the correction that lurks ahead, they’ll probably fall the hardest and accelerate the broader market’s decline.
Sure, the mega-cap tech companies are poised to prosper for many years to come. However, their valuations have risen to levels that make significant future price appreciation more difficult. It’s human nature to pile into the hot “story stocks” of the moment, but succumbing to the Fear of Missing Out is fraught with peril for individual investors.
The good news is, the team at Investing Daily has uncovered a small-cap technology stock that’s undervalued and largely ignored by Wall Street. It’s a super cheap stock tapped into a powerful trend: the global roll-out of 5G wireless technology. To learn more about our 5G value play, follow this link.
During these extraordinary times, with coronavirus whipsawing markets, where can risk-averse investors safely turn? I suggest you consider my colleague Jim Fink, chief investment strategist of our premium trading service Velocity Trader.
Jim has developed a scientific way to quickly and predictably multiply the gains of regular stocks. His technique works in up or down markets, in economic expansions or recessions…in normal times or during pandemics.
Called the Velocity Profit Multiplier (VPM), Jim’s proprietary investing method allows you to jump into trades with complete confidence because you know that when share prices move in the right direction, VPM will juice up your returns by 100%, 300%, even 800%…every time…in less than a month. Without fail. Even better, this scientific system turns around these profitable trades in 60 days or less.
Jim Fink is currently setting up his next trades, but there’s no time to lose. For all the details, click here now.
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