After a mixed Q1 earnings performance (see my previous blog post) in which I predicted and, eventually, saw most economy sectors under-performing up to the brink of bankruptcy (with famous „victims” such as Hertz International or LATAM Airlines), and the sheer rise to stardom of „work-from-home” sweethearts Zoom, Microsoft Teams, Slack, it’s easy to say that the Corona pandemic took a carefully selected toll on the business world.
As previously predicted, the superstars of Q1 have been the technology behemoths, starting with the FAANG group (Facebook, Amazon, Apple, Netflix, and Alphabet) and continuing with the fresh princes: Zoom, Slack and other collaborative tech companies.
I already mentioned in my previous analysis that, even though Q1 has been very good for business for the companies above, Q2 will not be so generous. More and more people find themselves out of a job, companies close or at least reduce volume, investment budgets disappear, research and development go bust, and consumers become more and more selective with their cash.
Macroeconomic data, in the US and elsewhere, fully supports the statement above and paints a very grim picture: US unemployment close to 25% (that’s more than 40 million people having no other choice but to apply for government help), a GDP drawdown of 34% according to analysts at Goldman Sachs.
It’s a dire future they predict, and it could get nasty for most S&P members. According to a research paper from factset.com, for Q2 2020, the estimated earnings decline for the S&P500 is 43.4%.
If 43.4% is the actual decline for the quarter, it will mark the most significant year-on-year decline in earnings reported by the index since Q42008 (-69.1%). On a per-share basis, estimated earnings for the second quarter have decreased by 35.9% since March 31st.
*image source: factset.com
I see most, if not all, market sectors dropping in terms of revenue, earnings per share, target prices, P/E ratios. In part, due to the global exposure most of them have which brings more considerable influence, and from Covid-19 induced crisis but also because there’s no winner when everybody’s worrying for tomorrow.
In an interconnected global economy, there can no longer be a superhero company floating above all else; we’re all in the same predicament.
Murdered by numbers
Don’t let yourselves be fooled by the YTD performance of US indices:
- NASDAQ – 9814 points ~13% YTD
- S&P – 3193 points ~2% YTD
- DJIA – 27110 points ~-2% YTD
*image source: Yahoo Finance
By looking at the figures above, one might think the markets are all but immune to the effects of the pandemic over the real economy. It’s my firm opinion that the fairytale in which the markets are living right now is soon to end, more precisely, with the Q2 earnings releases.
In terms of business sectors, I prefer to focus on a 4-pillar aggregate:
- Cyber-security companies
- Collaboration & conferencing products
- FAANG companies
- Automation companies
Here’s my vision over these diverse and peculiar sectors and how I see the performance on Q2 earnings:
*forecasts from money.cnn.com & TipRanks
This is not a place for the giving or receiving of financial advice, advice concerning investment decisions or tax or legal advice. This is being based on personal opinion and experience and it should not be considered professional financial investment advice.
Take into consideration that most target prices from the table above are on the optimistic side as pundits, experts, and analysts are always considering the “market sentiment” in their thought process, and the overall feeling of the market right now is one of “immunity” to the effects of the pandemic.
Delving deeper into the core of the problem, I say the economy is not reflected in the equity markets, and there’s been a division between market sentiment and market performance.
In times of uncertainty and crisis, people and markets alike return to the basics, which, in capital markets, boils down to coming back to the fundamentals. Caution is the word of the times, and this caution, combined with the weaker financial performances of global equities, will push the markets lower - the general decrease in prices will come.
I've always put my money where my mouth is; this is why I'm all-in shorting the markets until the end of the year. When life gives you lemons, you make lemonade. When, in turn, it gives you a discount, you buy full-on, pedal to the metal. Because it's smarter to ride the wave and not go against the giants of the global economy: USA, I guess 😊 & China
Sit tight, prepare yourselves and your investment portfolios for big moves, and stay calm – these are the steps I’m taking and have proven to be the right ones in 2008 and any other crisis before and after.