Stocks Keep Rallying, Despite Lack of Visibility on Economy
Date: Monday, May 4, 2020
Source: The Wall Street Journal
Investors say they are ‘flying in the dark’ as the dispersion of earnings estimates reaches its highest level since 2009
The coronavirus pandemic has upended expectations for corporate earnings and economic growth, so obscuring the outlook for financial markets that some investors say it is as if they are flying blind.
In ordinary times, many investors consider earnings projections a critical factor in determining what shares are worth and look to forecasts for metrics such as gross domestic product to gauge the health of the economy.
Now, as the pandemic disrupts industries from travel to manufacturing to retail, the only consensus is that those measures are doomed to fall.
Even so, stocks continue to rally, with the S&P 500 up 27% from its March low. Money managers attribute much of the bounce to stimulus from the Federal Reserve, but the disconnect between rising stock prices and a lack of visibility on the economy has lent an unsettled tone to the rally.
Many investors say they hesitate to jump back into the market when so much remains unclear, but they also fear missing out if stocks keep climbing.
Just how far earnings will fall is a subject of great debate. Disagreement among analysts has soared, with the dispersion of estimates for S&P 500 company earnings over the next full fiscal year reaching the highest level in March since May 2009, according to BofA Global Research.
“We’re flying in the dark here,” said Ted Chang, a portfolio manager at Thornburg Investment Management, which has $38 billion in assets under management. “All anyone can say with certainty is that estimates have to come down, and no one can say they need to come down by X, Y or Z amount.”
Investors will parse earnings reports this week from companies including Walt Disney Co., General Motors Co. and Hilton Worldwide Holdings Inc. and look to the April jobs report for clues about the outlook for the rest of the year.
The hazy view into the prospects for U.S. businesses presents a challenge for money managers who have already endured a wild ride this year. The S&P 500 plunged 34% between Feb. 19 and March 23 but has since rebounded sharply, cutting its losses for the year to 12%.
Analysts forecasting results for individual companies expect S&P 500 profits to decline 18% this year, according to FactSet, a stark reversal from their call at the beginning of the year for 9.2% growth. That estimate has continued to drop in recent weeks as first-quarter results have trickled in from about 55% of the companies in the index.
Even so, some investors suspect analysts have been slow to trim their forecasts.
“That’s a little bit of a worrying sign for markets, that we will go into the later parts of the year and we’ll just see this slow steady trickle of negative news as the outlook gets worse and worse,” said Matt Forester, chief investment officer at BNY Mellon’s Lockwood Advisors.
At BMO Capital Markets, chief investment strategist Brian Belski suspended his forecast for S&P 500 earnings over the course of 2020. He said results from the first half of 2020 don’t show a company’s fundamental condition.
“We plan to reinstate a year-end earnings number and year-end price target midyear, once the dust settles,” he said.
The opaque view has left investors discounting expectations for the first half of the year. Instead, many have taken an individualistic approach, evaluating which companies have enough cash on hand to withstand a prolonged downturn and which may be forced to close.
The five biggest U.S. companies— Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc. and Facebook Inc., which together make up about 20% of the market value of the S&P 500—reported results last week that showed Silicon Valley is generally faring well. Meanwhile, companies across other industries, including Hertz Global Holdings Inc., Neiman Marcus Group Inc. and Diamond Offshore Drilling Inc., have sought bankruptcy protection or are bracing for potential filings.
“There’s definitely going to be a few eggs that get broken,” said Anik Sen, global head of equities at PineBridge Investments.
Investors said the wide dispersion of estimates has made it especially hard to value stocks. The S&P 500 is trading at similar levels on a trailing and forward basis at 19.4 and 20.46 times earnings, respectively. That compares with the five-year averages of 20.18 and 16.92.
Forecasts for GDP—the value of all goods and services produced across economies—have been revised sharply lower and vary widely among banks and economists. JPMorgan Chase & Co., for one, expects the global economy to contract by 4.8% and the U.S. to fall 7.6% year over year in 2020, while Credit Suisse projects a more modest 1.9% decline globally and a 3.3% drop for the U.S.
A lack of data and historical precedent has sent economists grasping for new sources of insight, including Google Trends and restaurant-reservation company OpenTable.
David Coombs, London-based head of multiasset investments at Rathbone Investment Management, said he is focusing his investment strategy on the larger shifts the coronavirus and potential rolling lockdowns will bring: a greater dependence on technology and larger government spending.
“I’m not paying much attention to the economic forecasts because it’s mostly pointing fingers in the air,” Mr. Coombs said.