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Time for the Market to Get a Dose of Reality

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Dow Plunges 10% in Worst Trading Day Since 1987 Market Crash

For the first time since the coronavirus pandemic swept across America, investors will finally start hearing how severely businesses and the market have been affected by the outbreak and the resulting shutdown of our nation’s economy.

Today kicks off the first-quarter earnings season, and many on Wall Street are bracing themselves for a very rough ride.

The market has rebounded significantly from the March 23 lows. However, the rally may run into a roadblock if a significant number of companies report numbers well below already lowered expectations.

More than 70 S&P 500 companies have already withdrawn guidance and many more are likely to join them.

Overall, stocks in the S&P 500 are expected to report a 10.2% decline in profits. And keep in mind, the economy was only shut down for the last 3-4 weeks of the quarter.

What Market Data Say

Refinitiv’s Institutional Brokers Estimate System estimates that first-quarter profits will drop by 21% for financial companies. On the other hand, consumer discretionary companies will see a 30% decline in profits. Industrials will also see profits slip by 31%.

The price war between Saudi Arabia and Russia, coupled with tumbling WTI crude prices, will hit oil companies particularly hard. Profits are expected to decline by 50% or more.

In addition to earnings reports, we will also get economic data that Peter Boockvar, the chief investment strategist at Bleakley Advisory Group, thinks could snap the market back to reality.

The economic reports this week include mortgage applications, March’s retail sales, and March’s industrial production. It also includes April's housing market index, March’s housing starts and building permits, and initial jobless claims for last week.

“This is going to be a long slog. Any opening, and we’re all hoping it happens in the next four to six weeks, is going to be drawn out and slow,” Boockvar said. “Life is not going to be what we’re used to. That reality we face is what’s coming next,” he added. “I think company balance sheets are going to be where the focus is going to be. The bottom line is who is going to get through this and who is not.”

He added that conference calls coming with the release of earnings will be vastly different from those in the past. Back then, analysts rarely ask tough questions, he went on to say.

What Comes Next?

“It’s going to be a different type of conference call than a lot of people are going to be used to, when you’re going to have equity guys asking questions about debt covenants.”

Boockvar also expects companies to begin slashing dividends to preserve cash. He added that “a good balance sheet can turn into a bad one rather quickly when your revenues are going to zero.”

Ed Keon, chief investment strategist at QMA, believes that if a company does issue guidance for the remainder of the year, it will simply be guessing.

“We’ll see the guidance of course,” Keon said. He added that “companies will be guessing just as we’re going to be guessing what the impact will be.”

He also says that investors face a new challenge this earnings season.

“Not every company is going to survive this downturn,” he started. He also said, “trying to sort out which ones are likely to survive and which ones will thrive when this is over is going to be a challenge for investors.”

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