US results season preview: Q3 2020

interactive investor’s head of markets studies the investment landscape as the big US corporates begin reporting results for the last quarter.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

― Charles Dickens, A Tale of two Cities 

Rarely has a reporting season come at such an important juncture.

An impending presidential election which could see a change in power, a pandemic which crippled the global economy at its height, and one which continues to overshadow the recovery while touching the lives of many up to and including the President himself.

At the same time, the US economy is under the spotlight for good reason, particularly being as consumer dependent as it is. There have been increasing calls for the need for a fiscal stimulus package, without which the recovery could stutter or even turn into recession territory, with some large corporates already having announced big job losses.

Meanwhile, the polls increasingly suggest that Joe Biden is leading the race to the White House. The assumption that he would look to raise taxes would be negative for corporates in particular, thus putting pressure on the market. But this is offset by expectations that an immediate and comprehensive fiscal stimulus package would also follow.

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Another difference is in expectations for the season.

In normal circumstances, corporates provide guidance on both current and future prospects. However, any number of S&P companies have withdrawn forecasts or declined to provide projections, citing uncertainty caused by the pandemic. Should this continue in Q3, it will be even more difficult to measure what is actually happening on the ground as we enter the final few months of the year.

As is traditionally the case, the US banks will kick off the season in earnest.

They may also provide an early read across to what we can expect when the UK banks begin reporting later this month (Barclays is the first on 23 October).

In particular, eyes will be focused on any further Covid-19 related bad debt provisions and, where applicable, whether the banks’ trading units have been able to benefit from recent market volatility.

There is also the possibility that in the US especially, there will have been a spike in revenues arising from recent IPOs, fundraisings and corporate borrowing in general.

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On the downside, of course, historically low interest rates will continue to crimp the banks’ ability to benefit from the traditionally lucrative “borrow short and lend long” model.

There is also some froth in the asset management space (Morgan Stanley recently acquired Eaton Vance in a deal worth $7 billion) - could this augur something similar in the UK as the race for assets under management intensifies?

In more general terms, company earnings are again expected to show a sharp decline, although significantly better than the second quarter, which encapsulated the peak of the pandemic lockdown.

For sectors, it is expected that the worst hit will include transportation, consumer discretionary and energy, with the likes of technology and retail faring rather better.

Expectations remain high particularly in the tech space, where a newly formed working from home culture and a further explosion in online sales generally have made the technology-laden Nasdaq the star of the show in 2020. At the time of writing, index is ahead by an astounding 32% in the year to date.

Very early scores on the doors

Among the first to publish results, three of the largest companies have reported mixed earnings and as such there are no obvious conclusions to be drawn for the season at this very early stage. Wider market weakness also muddies the initial picture.

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Johnson & Johnson (NYSE:JNJ) shares finished down 2.3%, with the numbers being overshadowed by the announcement that it had paused its Covid-19 trial.

JP Morgan (NYSE:JPM) shares also dropped by 1.6%, with the bank maintaining its credit reserves against an uncertain outlook. More positively, its further bad debt provision of $611 million was lower than expected.

Citigroup (NYSE:C) shares fell 4.8% as it reported a 34% drop in profit, suffering from record low interest rates and a slowdown in loan demand due to economic pandemic concerns.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.