Earnings season started Tuesday with reports from three large-cap names.
Johnson & Johnson (JNJ) has run up substantially from the low it hit on March 23 and was able to trade up an additional 4% on a $0.30 beat. The company benefited from over-the-counter drugs such as Tylenol and good growth in pharmaceuticals, but even the medical business is not insulated from Covid-19 slowdowns and the company cut guidance to $7.50-7.90 from $8.95-9.10. Despite this reduction of more than 10%, the stock is only about 5% from its all-time highs.
The other two major reports were from banks JPMorgan Chase (JPM) and Wells Fargo (WFC) . Both stocks have bounced off the March lows but not nearly to the degree of others, such as JNJ, and both also posted earnings well below expectations and could only provide limited guidance. Both stocks have reversed to negative territory after a positive open. Unlike JNJ they are far closer to their 12-month lows than their 12-month highs.
These three stocks are good illustrations of what we are likely to see as earnings season continues to unfold. Those that don't have a business that benefits from coronavirus are going to have a hard time producing guidance and are more likely to see a "sell the news" reaction if they have recently bounced.
Even a company such as Johnson & Johnson that is fairly insulated from the crisis is still going to see some ramifications as the ripple effect hits all areas of the economy. The fact that JNJ is holding up so well goes to show that the market is not yet lowering the multiples it is willing to pay for some businesses.
If the market is willing to continue favor stocks similar to what it is doing right now with JNJ it will be a healthy earnings season for many, but if the lack of clarity causes a "sell the news" reaction like we see in major banks then it is going to be a very tricky quarter.
Right now this market is using the Fed stimulus to give companies premium valuations, although as actual reports are evaluated I expect to see more mixed action. While bears are being run over right now, the numbers and dynamics that are emerging during earnings season will make further upside difficult.