The second quarter is almost over, but what companies earned is a guess

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A man wearing a surgical mask walks past the New York Stock Exchange (NYSE) after more cases of coronavirus were confirmed in New York, New York, United States, March 10, 2020.

Andrew Kelly | Reuters

Fortunately, next week ends the first half of 2020.

This is the good news. The bad news: Wall Street has no idea what earnings will look like.

I’m not talking about the third and fourth trimesters. The second quarter is almost over and analysts still have no idea what earnings the companies will report.

And it is likely that the confusion will continue into the second half of the year.

A quarter of extremes in profit estimates

With 40% of S&P 500 companies refusing to provide advice, the gap between analysts’ estimates has rarely been wider.

Refinitiv is still forecasting a decline of about 43% in second quarter profits, the worst since the fourth quarter of 2008 – during the Great Recession.

Is it difficult to determine what corporate earnings will look like? A recent analysis by CNBC earnings editor Robert Hum showed huge differences between the high and low estimates for the largest stocks in the S&P 500 – orders of magnitude above historical norms.

To take IBM. The average estimate for the quarter is $ 2.06, but the difference between the high estimate, $ 2.49, and the low estimate, $ 1.47, is $ 1.02. The estimated range of averages for IBM in 2019 was 15 cents per quarter.

The range of analysts’ estimates for the second quarter is seven times greater than normal.

It is not unusual. To take JP Morgan, where analysts expect an average estimate of 99 cents. But the difference between the estimates for JPMorgan from high to low is $ 2.21 – from a gain of $ 2.04 to a loss of 17 cents. The average range of estimates for 2019 was 26 cents.

The second quarter analysts’ estimate range is nine times larger than normal.

Even with General Motors, where the analyst’s estimate range is five times larger than normal. Or caterpillar, where it is also five times larger than normal.

The most extreme examples of ignorance can be found in the actions of airlines. An example: Estimates for United Airlines range from a loss of $ 2.35 to a loss of $ 16.77, a difference of $ 14.42. The average difference between the high and low estimates for United over the four quarters of 2019 was 46 cents.

For Peter Cecchini of Alpha Omega Advisors, who has followed the markets for decades, the ignorance is understandable.

“It’s an unprecedented shock,” he said. “Analysts depend heavily on the direction of the company. When the management of the company has no idea of ​​its earnings, you can’t expect analysts to have a clue.”

Cecchini also pointed out that businesses are hurt and aided by big differences in how the coronavirus affects them and even in the degree of help they receive from the massive federal stimulus.

He pointed to JPMorgan’s estimates. “Analysts with the higher estimates probably think the stimulus will prevent higher levels of defaults, while those with lower estimates probably do not,” he said.

Profits in the second half of the year: expect more confusion

What does this mean for the third and fourth quarter results? For Miller Tabak’s Matt Maley, it’s a simple answer: “We need better advice from business. We need some of these CEOs who have withdrawn their advice to say, “We have better visibility now, this is what we think is happening. “

Maley isn’t optimistic about the future: “It’s impossible for companies to provide direction now, even for 2021. Reopening is a process of trial and error. You’re working on educated guesses, but due to the uncertainty it’s much harder to guess. It all depends on the virus. Volatility is going to be with us for a while. “

Even if we had better news on the virus, Maley said, the November election will keep volatility high, as well as trade tensions between China and the United States.

His best guess for equities in Q3: “There’s a very good chance we’ll have another 10% correction by Labor Day,” he said. “We set prices for perfection, and the indications are that we will not achieve that perfection.”

Cecchini is also not optimistic that the income confusion – and the virus will end soon. “If businesses don’t know what they’re going to do in the next six months, how are they going to know what’s going to happen in a year? asked Cecchini.

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