Q2 Earnings Season Starts Next Week – Stocks on Shaky Ground?

Public-listed companies will start to publish their earnings reports for the second quarter starting from next week and expectations had never been so depressed. Since the Western World had to face an economic lockdown, profit margins will be very likely close to 2008 levels. Some companies, like the FAANG group, are expected to be above the market average, but at this point, anything can happen and CFD trading activity will very likely be elevated during the next few weeks.

Depressed earnings expectations

With unemployment on the rise, sectors like tourism, travel, and commerce severely damaged, Q2 earnings will represent some figures to forget quickly because investors had not seen such thing in more than a decade. Governments and central banks had stepped up stimulus support, but that won’t be enough to outpace the economic pain inflicted by the COVID-19 pandemic.

We must also consider that more than 20% of the S&P500 companies were “zombie companies”, or entities that could barely generate enough profits to pay off their debts, at the beginning of 2020. Negative earnings will occur at a time when COVID-19 cases are rising at a record pace in the US and the combination of both could be detrimental for the bull run that started in March.

Could stocks resume selling?

It is assumed that the market had already priced in bad earnings numbers, although that’s ironical given the massive move higher in most stock market indices. However, if earnings turn out to be worse than expected and the forward guidance will not raise hopes for the V-shaped recovery, then stocks could resume selling. Central banks had already eased on their aggressive intervention and with lower liquidity inflows, market participants could start to at least take profits or bet on a larger corrective move lower.

A scenario where stocks continue higher?

This isn’t the first time the market expects poor earnings numbers only to see the released figures surprise on the upside. Better-than-expected earnings is a scenario where we could see confidence building up and stock prices moving higher. It will all depend on the sector because some (like tech and healthcare) could perform better, while others will take a much bigger hit. Overall, it is very likely that earnings will be poor and because of that, stocks might be overvalued at their current levels. What do you think about the Q2 earnings season and what companies are you focused on in the next few weeks?

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