While the market's recent bounce has been accompanied by encouraging news about slower COVID-19 case growth, it has also been accompanied by a general absence of anything besides very short-term business commentary from major publicly-traded companies.
Indeed, the customary move among publicly-traded firms that have talked in recent weeks about business trends has been to only share their sales and/or profit expectations for Q1. Second-quarter forecasts mostly haven't been given, and any full-year guidance that existed has typically been pulled (among tech companies, German software giant SAP (SAP) , which lowered its full-year guidance on Wednesday evening, is a notable exception).
At a minimum, all of this looks like a recipe for a decent amount of volatility as earnings season kicks off next week. As companies share Q2 guidance, field analyst questions about their second-half expectations and outline their efforts to cut costs amid nosediving revenue, markets will have a lot more than just Q1 numbers to react to.
In many cases, poor Q2 guidance might not by itself be enough to make a stock sell off. At a time when large portions of the economy are expected to remain closed at least through April and forecasts of 20%-plus and even 30%-plus Q2 GDP declines aren't hard to find, it's pretty clear that many investors are already expecting a lot of companies to guide for giant Q2 sales and profit declines.
On the other hand, given that the Nasdaq 100 is now back above November levels, and that the S&P 500 (in spite of including things like oil companies, airlines and restaurant chains) is now slightly above its June 2019 low and 17% above its Dec. 2018 low, markets could have a rough time if a lot of companies start indicating that they're not expecting a V-shaped demand recovery or something close to it.
In some cases, this could be signaled via rough full-year guidance. But with so many full-year outlooks being pulled right now, a lot of firms could decline to provide formal outlooks for anything beyond Q2.
However, many of these companies could still signal through their earnings call commentary, as well as through formal cost-cutting actions such as layoffs, hiring freezes, capital spending cuts and ad budget cuts, that they aren't counting on demand to quickly recover to pre-lockdown levels.
Economic ripple effects loom large here. When companies in sectors such as energy, auto, travel and hospitality see major revenue declines, that also impacts a wide variety of companies that list these firms as clients -- everyone from airplane and industrial equipment makers to software firms and ad-dependent media companies. And if a lot of those companies are seeing large order/bookings declines, there's a good chance this will impact their spending in many areas.
And all of these corporate spending cuts, in turn, could impact consumer confidence and spending. As it is, the massive layoffs that are taking place during the lockdown period are likely to weigh on consumer spending over the next few months, as is the fact that spending on a lot of the travel, recreation and dining activities that are currently impossible might not fully recover to pre-lockdown levels until a COVID-19 vaccine is in mass-production.
It's possible that such bad news gets partly offset by good news in other areas. For example, by hard-hit companies reporting that their cash burn isn't as bad as feared, or by some of the companies getting a boost in this environment reporting that they're doing even better than hoped.
But all the same, investors should be aware that earnings season could bring with it a lot of unsettling announcements and disclosures that companies are mostly refraining from making for the time being.
