By Tom Burnett CFA
On April 14, 2020, two large banks (Wells Fargo, JP Morgan) opened the first quarter earnings reporting season. As expected, the results were dismal. Wells Fargo reported net income of $653 million, down sharply from the $5.9 billion reported in the first quarter of 2019. During the quarter, the bank recorded a Loan Loss Reserve charge of $4.0 billion, up from a charge of $900 million in the prior year’s first quarter. Similarly, JP Morgan recorded net income of $2.9 billion, down from $9.2 billion in the 2019 first quarter. The bank recorded a charge of $8.3 billion for the Loan Loss Reserve, compared to just $1.5 billion in the 2019 first quarter. Both banks cited the coronavirus outbreak and the countermeasures in their explanation of the weak operating performance. Since the first quarter included only one month of the global virus pandemic, the clear message is for the June quarter to represent another period of difficult operating performance.
On a general note, the April 13 edition of the online “Wall Street Journal” reported that more than 300 companies in the S/P 1500 Index had officially withdrawn previous earnings “Guidance” for the 2020 year. In early March, none of these companies had withdrawn its Guidance.
The recent data reports from FACTSET support these trends of weaker earnings in 2020. In its April 9, 2020, report, FACTSET gives a consensus S/P 500 Index 2020 earnings figure of $152.81, down 13.2% from its 2020 forecast issued on February 21. FACTSET also disclosed that at the end of 2019 the first quarter consensus estimate was for growth of 4.3% from the 2019 first quarter. The latest forecast now expects a decline of 10.0% from the 2019 first quarter.
Investors need to prepare for the upcoming negative earnings news as the 2020 results start coming in. Given the depth of the global economic slowdown, the consensus earnings estimates are likely too high and will be adjusted downward as the year progresses.
Tom Burnett CFA is Director of Research