Earnings? What Earnings?

Major banks kicked off earnings seasons early this week and analysts expect a 43.8% decline in earnings. This could be the largest decline in earnings since 2008. 

• Big banks including JPMorgan, Citigroup, Goldman Sachs reported revenue numbers that beat analyst expectations. Wells Fargo was the only big bank to disappoint.

THE EXPLANATION

Once every quarter, companies release an earnings report on their business performance. Uncertain economic conditions in March forced companies to withdraw their earnings forecast, leaving investors with little information on how companies performed.

Early earnings reports are sending mixed messages about the economy. Starting July 13, Big banks and Delta Airlines reported earnings that warned investors of a slower than expected recovery.

• The largest banks gave a signal that the worst of the virus is yet to come as they put aside tens of billions of dollars to prepare for a wave of bankruptcies. Despite JPMorgan beating earnings expectations and Citigroup beating revenue expectations, both their stocks fell on the day of the earnings release.
• Delta predicts that the travel industry will take more than two years before seeing a sustainable recovery. In the short term, Delta sees a decline in flight bookings as COVID cases continue to rise. On July 14, they reported a revenue drop of 88% in their second-quarter earnings.

THE ACTION

Let’s see what some professional investors are recommending:

• Dennis DeBusschere of Evercore ISI, recommends financial stocks as “there’s upside potential for a battered-down sector that’s priced in negative headlines already.” His recommendation… buy financial stocks.
• Lisa Shalett of Morgan Stanley, warns that tech companies have high expectations to reach and warns of earnings that may not reach those estimates. Her recommendation… be careful with tech stocks.
• Stuart Kaiser of UBS Securities recommends industrials as the firm’s “big data” analysis shows revenue for industrials above estimates. His recommendation… buy industrial stocks.

Earnings to watch out for (Full earnings release calendar here):

• July 16: Netflix ($NFLX), Domino’s Pizza ($DPZ), Johnson & Johnson ($JNJ)
• July 21: Snapchat ($SNAP), United Airlines ($UAL), Coca-Cola ($KO)