Earnings test for roaring markets

As Warren Buffett has just offloaded US$30mil worth of stocks, many take it as a possible sign of another market reversal.

STOCK markets that are racing ahead of the real economy may appear too optimistic as recovery is still uncertain.

The earnings season, which kicks off this week, will reveal the severity of the damage that Covid-19 has wrought.

Against the increasing magnitude of the slowdown, Goldman Sachs has cut its earnings forecast three times for 2020; it now expects earnings per share of S&P 500 companies at US$110, a drop of 33% against 2019.

Investors with a risk appetite must be aware that high prices for companies with near zero revenue for the foreseeable future, cannot be sustained.

When the quarterly results are released, many of such companies will be revealed as the “emperor with no clothes”.

As Warren Buffett has just offloaded US$30mil worth of stocks, many take it as a possible sign of another market reversal.

Some speculate that the record cut in oil production may help to support stocks, although the cuts still cannot offset the expected drop in oil demand.

The S&P 500 and Dow Jones Industrial Average were recently said to have surged back into a “new bull market”, since their lows on March 23, when they were in a bear territory.Stocks were said to be boosted by the bazooka of stimulus packages and liquidity measures that were poured into markets and economies.

Markets usually run ahead of the economy by six months, but looking at the mounting job losses and plunging growth forecasts, can economies recover by the end of the year?

What if the virus goes into a second wave? Results of the vaccine trials are still not out; much hope is placed on the current trial by Moderna, while the trials by Johnson & Johnson are slated for September.

Starbucks has issued below consensus earnings forecast for the second quarter (Q2), and withdrawn full year guidance, while expecting the financial impact on Q3 to be “significantly greater” than Q2, possibly extending into Q4.

Goldman Sachs has revised its forecast for US real Gross Domestic Product (GDP) growth to plunge by minus 34% in Q2, compared with the largest quarterly drop of minus 10% in 1958. It expects a rebound in Q3.

JP Morgan sees that “most risky assets have probably made their lows for this recession”, and should trade higher in Q2.

But bond king Jeff Gundlach views that the stock market remains “dysfunctional”, and may suffer a more “enduring low”.

In 2008, US markets fell after Lehman Brothers collapsed, rallied on some positive impact from measures such as the troubled asset relief programme, and then dropped again as earnings cratered.

China has shown the world that Covid-19 can be contained at the expense of economic implosion in the short term, said Socio Economic Research Center executive director Lee Heng Guie.

Against warnings of over-interpreting green shoots, China’s economy is expected by some optimists to be able to rebound quickly.

Chinese manufacturing and service sector activities had unexpectedly expanded in March, but its foreign trade is expected to show continuous decline.

Building on hopes that the outbreak can be contained, the optimist camp is betting that this pandemic will have a one-off impact on the global economy; things will return to normal once the fears wear out.

So much for hopes and bets.

Markets always look ahead, trying to guess when the economy will recover and people look for opportunities to make as much money as possible.

The macro picture indicates that there could be more bad news ahead on the outbreak and, in turn, the economy, says Malaysian Rating Corp associate director, economic research division, Nor Zahidi Alias.

Singapore has just entered its one-month lockdown, and Indonesia is said to be a possible time bomb in terms of infections.

While infections in Western countries have yet to peak, the curve was flattening for most Asian countries, but we are seeing a pick-up in imported cases lately.

Recovery will depend on how soon the outbreak ends, and when broken supply chains can be repaired.

Markets will remain volatile, and there are good reasons to say that they were moving well ahead of the economy, says Zahidi.

Bursa Malaysia still has room to rebound as the valuations are just too low at financial or economic crisis levels, says Areca Capital CEO Danny Wong.

Malaysia’s growth will be affected but Wong believes it will be a quick recovery if we manage to control the situation now.

A few sectors have been lifted from the movement control order, pending a final decision on their locations; the next few weeks will be crucial for the containment of the virus situation in Malaysia.

Columnist Yap Leng Kuen cautions that bets are better made in casinos. The views expressed are the writer’s own.