Don't be fooled by the strength of Q2 earnings

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The profit season has skyrocketed and so far it's been better than feared. That may not be saying much, as expectations for the second quarter were already so low and expected to be terrible. More importantly, expectations for future quarters, at least so far, have shown some signs of stabilization – that is, they are no longer falling.

But not everything is rosy, because the tone of some companies has been one of concerns about the economic outlook. Even the Fed pointed to signs of a slow recovery at the latest, as on July 30 it turned out that job losses are getting higher again.

Weekly Initial Jobless Claims

Lower Expectations

According to data provided by Thomson Reuters, 45% of companies reported results in the results, of which 81% beat analyst consensus estimates , while 18% lacked estimates and 1% met. It may not say much. According to S&P Jones data, second quarter earnings expectations since the beginning of 2020 have fallen since the beginning of 2020 to approximately $ 22.59 as of July 23. It is down nearly 44% from the second quarter a year ago.

But the good news is, at least for now, that earnings expectations for the third and fourth quarters have recently improved. The third quarter is currently expected to have a profit of $ 31.26, while the fourth quarter is expected to reach $ 35.88. That's better than estimates of $ 30.89 and $ 35.74 as of June 30, respectively.

Slower Path

Still, some companies have noted that they are not as optimistic about the path of economic recovery and see that it may take longer than expected. And this degree of pessimism spans the different sectors of the stock market. For example, in the earnings call for Anglo-Dutch consumer goods producer Unilever (NYSE :), a defensive stock, the CEO noted that a rapid recovery is on the optimistic side. That a deep global recession has already started as consumer habits have already changed. Boeing (NYSE :), one of the ultimate cyclical parties, also stated during its appeal that the recent recovery in COVID-19 cases had delayed recovery and any improvement could be uneven.

In addition, there are some recent economic data suggesting that the rate of recovery is slowing relative to the initial post-lockdown boom seen a few months ago. Recent data from the NY Fed Weekly Economic Index shows activity has flattened since the first week of July. The first claim data also showed that the number of people who claim unemployment benefits for the first time has increased in the past two weeks. Finally, the number of people who continue to receive unemployment benefits has risen to nearly 17 million for the first time since April last week.

Two Paths

For the time being, there seem to be mixed signals about the pace of recovery and how that can translate into corporate earnings. It could suggest that earnings expectations for the second half of 2020 are too high and should fall. Or that concerns about resilience in the economic recovery will subside and allow for a stronger recovery.

Investors will have to weigh a lot once the profit season ends. Factor these results with the lack of clarity surrounding the economic recovery, along with current market valuations, and it may take a few choppy weeks.

Michael Kramer is a financial market strategist and portfolio manager of the Mott Capital Thematic Growth Portfolio.

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