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| Dismal Earnings, Bullish Stock Investors and the Fed’s Invisible Hand | Dismal Earnings, Bullish Stock Investors and the Fed’s Invisible Hand |
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| Wall Street analysts have grown increasingly pessimistic in recent weeks about the outlook for corporate profits, even as investors have pushed markets steadily higher, breaking the link between analyst forecasts and the direction of stock prices. | Wall Street analysts have grown increasingly pessimistic in recent weeks about the outlook for corporate profits, even as investors have pushed markets steadily higher, breaking the link between analyst forecasts and the direction of stock prices. |
| Most companies in the S&P 500 stock index have reported their first-quarter earnings, and the impact of the coronavirus pandemic on profits is becoming clear, at least for January through March. On a per-share basis, profits of S&P 500 companies fell by 13 percent, making it the worst slump since 2009. | Most companies in the S&P 500 stock index have reported their first-quarter earnings, and the impact of the coronavirus pandemic on profits is becoming clear, at least for January through March. On a per-share basis, profits of S&P 500 companies fell by 13 percent, making it the worst slump since 2009. |
| Analysts think things will get worse before they get better. At the end of March, the consensus among analysts was that profits at companies that make up the index would sink a modest 1.8 percent in 2020. But after digesting the financial reports of companies from Agilent Technologies to Zions Bancorp, they now think 2020 profits will tumble more than 20 percent. | Analysts think things will get worse before they get better. At the end of March, the consensus among analysts was that profits at companies that make up the index would sink a modest 1.8 percent in 2020. But after digesting the financial reports of companies from Agilent Technologies to Zions Bancorp, they now think 2020 profits will tumble more than 20 percent. |
| Any finance textbook’s section on equity prices holds that the direction of the stock market is determined, to a large extent, by the profits and dividends that shareholders expect companies to produce in the future. And academic research has repeatedly shown that when Wall Street analysts revise their forecasts for a company’s profits, it can move share prices. | Any finance textbook’s section on equity prices holds that the direction of the stock market is determined, to a large extent, by the profits and dividends that shareholders expect companies to produce in the future. And academic research has repeatedly shown that when Wall Street analysts revise their forecasts for a company’s profits, it can move share prices. |
| Traders and investors routinely take note of when analysts erase earlier expectations, using those revisions as a real-time gauge of how the fundamental business prospects of corporate America are looking. | Traders and investors routinely take note of when analysts erase earlier expectations, using those revisions as a real-time gauge of how the fundamental business prospects of corporate America are looking. |
| Going by the conventional wisdom, the current collapse in profit expectations — and analysts’ woeful prognoses for future earnings — should be clobbering share prices. But investors don’t appear to be taking their cues from analysts. The S&P 500 has soared more than 30 percent over the last two months. | Going by the conventional wisdom, the current collapse in profit expectations — and analysts’ woeful prognoses for future earnings — should be clobbering share prices. But investors don’t appear to be taking their cues from analysts. The S&P 500 has soared more than 30 percent over the last two months. |
| To be sure, investors priced in some downturn in profits when stocks suffered a 34 percent collapse in February and March. They were right, and the pain, reflected in earnings reports, was widespread. | To be sure, investors priced in some downturn in profits when stocks suffered a 34 percent collapse in February and March. They were right, and the pain, reflected in earnings reports, was widespread. |
| Bank earnings were fairly awful. Quarterly profits at JPMorgan Chase, Wells Fargo and Bank of America all undershot Wall Street expectations, thanks to the costs of setting aside large amounts of cash to cover an expected surge in borrowers who can’t make loan payments because they’re suddenly unemployed. Numbers from credit card issuers like Capital One and Discover were also ugly. | Bank earnings were fairly awful. Quarterly profits at JPMorgan Chase, Wells Fargo and Bank of America all undershot Wall Street expectations, thanks to the costs of setting aside large amounts of cash to cover an expected surge in borrowers who can’t make loan payments because they’re suddenly unemployed. Numbers from credit card issuers like Capital One and Discover were also ugly. |
| Firms that rely on discretionary consumer spending were, unsurprisingly, hammered. The casino operator Las Vegas Sands posted a first-quarter loss of $51 million, compared with a profit of $744 million during the same period last year. Profits fell 92 percent for the hotel company Marriott International. The cruise line Carnival lost $781 million during the first quarter. Even Amazon.com, ideally positioned for a world reliant on home deliveries, saw profits fall 29 percent as the costs of keeping open during the crisis increased. | Firms that rely on discretionary consumer spending were, unsurprisingly, hammered. The casino operator Las Vegas Sands posted a first-quarter loss of $51 million, compared with a profit of $744 million during the same period last year. Profits fell 92 percent for the hotel company Marriott International. The cruise line Carnival lost $781 million during the first quarter. Even Amazon.com, ideally positioned for a world reliant on home deliveries, saw profits fall 29 percent as the costs of keeping open during the crisis increased. |
| Over the last few weeks, disappointing earnings announcements sent share prices down 1 percent on average. (That’s far less than the nearly 3 percent drop stocks suffered on average after falling short of expectations in recent years, according to research from the data provider FactSet.) | Over the last few weeks, disappointing earnings announcements sent share prices down 1 percent on average. (That’s far less than the nearly 3 percent drop stocks suffered on average after falling short of expectations in recent years, according to research from the data provider FactSet.) |
| Close observers of stocks won’t be surprised. After all, market sentiment has grown increasingly detached from the abysmal outlook for economic growth, another supposedly fundamental building block of market prices. Instead, stocks have climbed even as the consensus expectation among Wall Street economists forecasts a 30 percent annualized rate of decline for gross domestic product this quarter, according to FactSet. | Close observers of stocks won’t be surprised. After all, market sentiment has grown increasingly detached from the abysmal outlook for economic growth, another supposedly fundamental building block of market prices. Instead, stocks have climbed even as the consensus expectation among Wall Street economists forecasts a 30 percent annualized rate of decline for gross domestic product this quarter, according to FactSet. |
| Updated July 7, 2020 | |
| The coronavirus can stay aloft for hours in tiny droplets in stagnant air, infecting people as they inhale, mounting scientific evidence suggests. This risk is highest in crowded indoor spaces with poor ventilation, and may help explain super-spreading events reported in meatpacking plants, churches and restaurants. It’s unclear how often the virus is spread via these tiny droplets, or aerosols, compared with larger droplets that are expelled when a sick person coughs or sneezes, or transmitted through contact with contaminated surfaces, said Linsey Marr, an aerosol expert at Virginia Tech. Aerosols are released even when a person without symptoms exhales, talks or sings, according to Dr. Marr and more than 200 other experts, who have outlined the evidence in an open letter to the World Health Organization. | |
| Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. | Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days. |
| Scientists around the country have tried to identify everyday materials that do a good job of filtering microscopic particles. In recent tests, HEPA furnace filters scored high, as did vacuum cleaner bags, fabric similar to flannel pajamas and those of 600-count pillowcases. Other materials tested included layered coffee filters and scarves and bandannas. These scored lower, but still captured a small percentage of particles. | Scientists around the country have tried to identify everyday materials that do a good job of filtering microscopic particles. In recent tests, HEPA furnace filters scored high, as did vacuum cleaner bags, fabric similar to flannel pajamas and those of 600-count pillowcases. Other materials tested included layered coffee filters and scarves and bandannas. These scored lower, but still captured a small percentage of particles. |
| A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico. | A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico. |
| The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth. | The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth. |
| The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave. | The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave. |
| So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement. | So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement. |
| Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. | Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks. |
| A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. | A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study. |
| If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) | If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.) |
| If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. | If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others. |
| Plenty of explanations have been offered to help explain the market’s blasé approach to a bleak reality facing corporate America. Some say the bad economic news was already priced in during the March collapse. Others argue that markets are simply “discounting” — that is basically betting — that the U.S. will enjoy a V-shaped, or robust, economic recovery. Another argument is that investors, who tend to be forward-looking, are simply setting their sights on a future where the pandemic is a distant memory. | Plenty of explanations have been offered to help explain the market’s blasé approach to a bleak reality facing corporate America. Some say the bad economic news was already priced in during the March collapse. Others argue that markets are simply “discounting” — that is basically betting — that the U.S. will enjoy a V-shaped, or robust, economic recovery. Another argument is that investors, who tend to be forward-looking, are simply setting their sights on a future where the pandemic is a distant memory. |
| The most powerful reason is simpler: It’s the actions of the Federal Reserve. | The most powerful reason is simpler: It’s the actions of the Federal Reserve. |
| Since March 23 — the day the stock market rally began — the Fed has done its best to ensure that the returns on bonds are quite low by signaling its willingness to buy unlimited quantities of Treasury and government-backed mortgage bonds. It has also ventured into buying corporate bonds, which helped push yields on such bonds lower too. The goal, in part, is to push investors away from the safety of the bond markets and into riskier assets, like stocks. | Since March 23 — the day the stock market rally began — the Fed has done its best to ensure that the returns on bonds are quite low by signaling its willingness to buy unlimited quantities of Treasury and government-backed mortgage bonds. It has also ventured into buying corporate bonds, which helped push yields on such bonds lower too. The goal, in part, is to push investors away from the safety of the bond markets and into riskier assets, like stocks. |
| In a recent note, analysts at JPMorgan argued that these programs by the Fed “likely has a bigger positive impact on equity valuation, compared with the negative impact of the temporary earnings loss.” | In a recent note, analysts at JPMorgan argued that these programs by the Fed “likely has a bigger positive impact on equity valuation, compared with the negative impact of the temporary earnings loss.” |
| Translation: The Fed’s efforts to keep interest rates and bond yields low has more than offset the collapse in profits for S&P 500 companies, helping to keep the market aloft even though corporate profitability and the economy look like they will be gloomy for a while. | Translation: The Fed’s efforts to keep interest rates and bond yields low has more than offset the collapse in profits for S&P 500 companies, helping to keep the market aloft even though corporate profitability and the economy look like they will be gloomy for a while. |
| A similar thing happened during the last financial crisis. Interest rates and bond yields fell to low levels that would have been unthinkable previously, which many partly attributed to central bank actions. And for the years that followed prices of assets such as stocks, bonds and real estate all rallied to levels that looked high relative to the sluggish level of economic activity after the crisis. | A similar thing happened during the last financial crisis. Interest rates and bond yields fell to low levels that would have been unthinkable previously, which many partly attributed to central bank actions. And for the years that followed prices of assets such as stocks, bonds and real estate all rallied to levels that looked high relative to the sluggish level of economic activity after the crisis. |
| So while corporate profits are supposed to be the fuel that revs the stock market’s engine, in the short term, Federal Reserve policy remains in the driver’s seat. That explains why investors are willing to ignore what analysts have to say, at least for the moment. | So while corporate profits are supposed to be the fuel that revs the stock market’s engine, in the short term, Federal Reserve policy remains in the driver’s seat. That explains why investors are willing to ignore what analysts have to say, at least for the moment. |