The longest year ever sure is going fast! Suddenly it’s Q2 and we’re awaiting a fresh batch of earnings reports, but amidst a global pandemic, do they matter?
Earnings season has well and truly kicked off and the wider market seems to have reacted positively so far. On Tuesday, the Dow (NYSEARCA: DIA) closed up 2.4%, while the S&P 500 (NYSEARCA: VOO) was up 3.1% and the Nasdaq (NASDAQ: NDAQ) rose nearly 4%.
Is this because Big Pharma giant Johnson & Johnson (NYSE: JNJ) is riding a coronavirus wave, beating on earnings in Q1? Or that the first major bank to report earnings, JP Morgan (NYSE: JPM), beat expectations on net interest income — the money it earns from loans, minus the interest it pays out? Has this given investors confidence that upcoming financial earnings from giants such as Morgan Stanley (NYSE: MS) or Goldman Sachs (NYSE: GS) will be just as positive?
The answer is that we have no idea. Sure, we’ll take the little victories for now, but let’s not forget that Q1 runs from January to March, and we really only started seeing lockdowns and other adverse effects well into March. That still leaves more than 2 months where the market sat firmly in bull territory.
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The market’s reaction makes no sense
As is always the case, earnings still have a role to play for investors and the companies providing them. We will have to wait and see how other big banks do, as this is normally a good gauge of how the overall market is doing.
However, what we shouldn’t be doing is assuming that everything is just fine. Sure, JP Morgan beat on net interest income, but the rest of its numbers were far from promising, with YOY revenue dropping 16% — its worst performance in 16 quarters. We also seem to be conveniently ignoring the fact that Wells Fargo (NYSE: WFC) stock fell 5% last night due to an atrocious 89% drop in net income YOY.
How did the market react? Well, you’ve seen already: the major indices all closed in the green last night.
Meanwhile, we’re seeing some crazy moves in individual equities. Amazon’s (NASDAQ: AMZN) hitting all-time highs, up nearly 19% in the last six sessions. Tesla’s (NASDAQ: TSLA) up 56% since April 2, and Advanced Micro Devices (NASDAQ: AMD) is up 29% since April 3.
Fair enough, Amazon is seeing an unprecedented surge in e-commerce activity, as people melt into their sofas in isolation. However, it’s also firing staff for having the audacity to ask for safer working conditions amid a pandemic. The sheer audacity…
Shopify (NYSE: SHOP) is also on the rise lately, up 10% on Tuesday alone. The same Shopify which relies heavily on small to medium-sized businesses; the same businesses that are getting hit hard during this downturn.
I could list off 100 other examples here, but I think you get the gist of it.
So, do earnings really matter?
Ah yes, I had a point before I went off on the nonsensical nature of the market, didn’t I? Well, it is this:
This whole earnings season has become pointless already. Next quarter could be meaningless as well if the pandemic continues to have the same effect throughout Q2. This situation is completely new to us as a modern species, and hopefully will never happen again, but it’s here now, and that’s all that matters.
Expectation is still the name of the game but the focus has shifted. The only thing that matters now is just how bad COVID winds up being, how long this lonely quarantine continues, and how capable businesses are of surviving and then ramping back up internally and on the demand side. The focus of expectations has shifted from earnings to how long it will take to get business back on track.
Earnings usually look back, while in current conditions no one has any interest in past performance, it’s all about future outlook. With many businesses foregoing their guidance this quarter, it has further trivialized this earnings season.
This is the new game, and these are the new targets.
Things will get better
Nobody knows how or when, or what it will cost, but things will get better. Even if we have a recession on the way, sectors continue to fall, and we watch every last bit of content on Netflix (NASDAQ: NFLX) and Disney+ (NYSE: DIS), the market will rise again, as it always has, historically.
Not all companies are suffering either, and in fact, some are thriving. Zoom (NASDAQ: ZM) has soared in popularity (despite privacy concerns), Slack (NYSE: WORK) will be an interesting earnings call, and gaming stocks such as Activision (NASDAQ: ATVI) are bumping.
We’ll be entering a new age for mankind, one in which companies have adapted, and will be prepared for the next pandemic.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.