The US stock chief at UBS breaks down his 5-part strategy for investors looking to dominate the most uncertain earnings season in years
- The top US equity strategist at UBS told clients in a note this week that global earnings results are set to "plummet" as the novel coronavirus wreaks havoc on economic growth around the world.
- While Keith Parker is advising investors to look for signs of earnings momentum across the market, he identified five more granular points to keep in mind while sorting through messy reports.
- For instance, Parker noted that the industrials sector is poised to suffer the greatest expect decline in earnings per share, while banks and insurance names have already priced in much of the damage.
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Corporate earnings season always keeps the investment community on its toes, but the round of upcoming numbers in the US will test even the savviest investors.
As results start flowing in over the next week, with many big US banks slated to report during the second week in April, analysts are expecting a brutal series of reports reflecting severe COVID-19 damage.
First-quarter earnings for S&P 500 companies are expected to decline 7.3%, the largest year-over-year drop since they fell 15.7% in the third quarter of 2009, according to an analysis from the data provider FactSet.
Ahead of companies' stream of reports, Keith Parker - the top US equity strategist at Swiss bank UBS - detailed his earnings playbook in a note to clients. Earnings results around the world, he warned, are set to "plummet."
While Parker is advising investors to seek out signs of earnings momentum across the market (in other words, rising company profits) he identified five more granular points to keep in mind:
1. Of the S&P 500's cyclical sectors, analysts expect to see the largest expected decline in industrials.
Of sectors that are cyclical in nature, industrials are set to report the largest decline in earnings, with weak earnings per share (EPS) momentum, Parker said.
The sector - comprised of big names involved in material production, construction, and aerospace like Boeing, Lockheed Martin, and Raytheon - has been hit by a severe slowdown in economic growth.
Industrials have the largest difference between analysts' EPS changes over the last month (-18%) and Parker's analysis of the sector's implied -31% change, he said, suggesting the "coming downgrades could be large."
Some companies have come out with pre-earnings announcements.
Caterpillar, one of the largest holdings in the Industrial Select Sector SPDR Fund, said in a statement on March 26 that the "continued spread of the COVID-19 pandemic" is starting to impact its supply chain. The company also listed the spread as a risk factor in an annual filing in February.
2. Bank and insurance stocks have already priced in much of the damage already.
Bank and insurance stocks, found in the financials sector have "overshot" implied EPS downgrades most according to Parker's estimates, he said.
That suggests a lot has already been priced in, and could see relatively minimal damage once their numbers finally come out. Downward revisions to S&P 500 earnings estimates were led by the financials sector during the first week in April, according to a FactSet analysis.
Financial services firms are highly exposed to the market's wild swings, which could bode well for big banks' trading operations that thrive on volatility, but hurt total assets in areas like wealth management.
Low interest rates are also considered a headwind for the group, since they eat into banks' profitability; the Federal Reserve slashed rates twice last month. According to Parker's analysis, that's already baked into financials' prices.
3. The utilities sector is poised for upside.
Parker said the utilities sector - considered a reliably defensive group during times of market distress - stands out as having relative upside for this upcoming earnings season.
Analyst earnings-revision trends have been "least" negative for the utilities and healthcare of all S&P sectors, he said, which could suggest a positive showing for the group.
The utilities sector is comprised of names involved in electricity and other utility services consumers use, like ConEd.
4. Healthcare's earnings-per-share momentum is strongest of the sectors.
Healthcare equipment and services names are still underperforming the market even as earnings trends are resilient, Parker said. That leads him to believe that momentum around healthcare's earnings results is strongest of the sectors.
In other words, analysts may have more room to up their estimates for the group heading into earnings season.
The SPDR Healthcare Select Sector fund - an ETF that tracks the sector - has fallen 9% this year, outperforming the S&P 500's 17% drop during that time. And with healthcare companies at the center of the coronavirus outbreak, many have issued responses to the industry's upheaval.
Johnson & Johnson, for instance, said in a March 27 statement that it was "experiencing increased consumer-driven demand" as a result of COVID-19, and is taking "all possible measures to maximize product availability."
5. Overall, Parker recommends investors go long US equities, as well as markets in China and North Asia, over Europe and other emerging markets.
Earnings momentum is stronger in the US, China, and the wider North Asia region than in Europe and the rest of emerging markets, Parker said.
Analyst earnings estimate downgrades are larger than in the US, while China and North Asia are falling in-line with expectations, he said.
The firm's European strategists estimated that Stoxx 600 earnings next year could be 25% below levels seen in 2019 in a bear case, while earnings could see a "similar or worse recovery."
The iShares China Large-Cap ETF has fallen 11.7% so far this year, outperforming the S&P 500's drop in that time.