US earnings season: what US company results for Q2 2020 might look like?

Our head of markets looks forward to second-quarter and half-year results from corporate America.

The US second-quarter and half-year earnings season begins in earnest next week.

Bearing in mind that the quarter bore the brunt of the coronavirus pandemic, a number of companies will be providing updates which will probably make for ugly reading.

Many of the sectors most obviously affected have already seen their shares marked down and, indeed, in March the markets generally suffered from indiscriminate declines, although some have recovered, most notably in the tech sector.

The first week of the earnings season proper will be dominated by the banks, as is usually the case.

JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Goldman Sachs Group (NYSE:GS), Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) will all be reporting.

Investors will be looking out for the ongoing effects of historically low interest rates - typically negative for the bank sector - any further bad loan write-downs, the impact of extremely volatile markets on their trading units and, in some cases, which banks have seen the benefits of organising credit facilities for cash-strapped corporates.

More broadly, the greatest fiscal and monetary stimulus packages from governments and central banks around the world have put some solid recovery foundations in place.

Indeed, they may not only have averted an inevitable recession turning into a depression, but may also have accelerated the economic rebound.

Some surprisingly strong economic data from the US recently, in the form of non-farm payrolls and retail sales, means that talk of a V-shaped recovery is not entirely off the table, although a rather more gradual “U” or “Nike swoosh” shape seem the more favoured consensus estimate.

Quite apart from the fact that the market is forward looking, so is in some ways detached from the real economy, companies have been forced during the severe (and hopefully brief) recession to take a red pen to their cost lines.

Many have deferred or cancelled dividend payments, proposed capital expenditure, and have unfortunately laid staff off as evidenced by a jump in the unemployment rate from 3.5% to almost 15% in just two months.

Such has been the speed of the downturn, these necessary cost streamlining measures have needed to be undertaken in a fraction of the time that would normally be the case in a recession – and, equally, these companies will find themselves leaner and perhaps better prepared for any upcoming improvement in fortunes.

As we begin the second half of the year, the position looks rather more positive than it had at the end of the first quarter.

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In the year to date, the Dow Jones Industrial Average has lost 8%, with the broader S&P 500 down just 1.6%.

The standout performers have been tech shares, with the Nasdaq continuing to scale new highs and having added 16% in the year to date.

Much of this turbocharge has come from the tech giants, with the market capitalisation of both Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) now standing at $1.6 trillion. Not far behind is Amazon (NASDAQ:AMZN) with a tag of $1.4 trillion, whose share price recently exceeded $3,000, representing a jump of 82% since the March lows, while Google owner Alphabet (NASDAQ:GOOGL) has recently nudged over $1 trillion for the first time.

An interesting hybrid has also emerged in the form of Tesla (NASDAQ:TSLA), where the company is now rated as a tech stock rather than a simple auto company. 

Its estimated forward price/earnings (PE) ratio of over 200 is far closer to that of Amazon at over 140 than Ford’s single-digit 10-year historical average. 

Tesla shares are up 228% in the year to date to peak of over $1,400, more recently bolstered by an update in which it reported second-quarter deliveries of more than 90,000, beating analyst estimates and contrasting with rival auto makers suffering under pandemic disruption.

Analysts had expected an outcome of around 75,000, down from its first-quarter delivery total of 88,400 given the Covid-19 backdrop.

Indeed, Tesla recently overtook Japan’s Toyota (NYSE:TM) to become the world’s most valuable automaker with a stock market value of over $200 billion. 

With electric vehicle penetration shy of 1% in the US and roughly 2% globally, there's clearly more to go for, but there are nonetheless concerns that Tesla's valuation has forged ahead of events.