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Has the Market Bottomed Already?

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The major stock market indexes made a ferocious turnaround this week, making it difficult to catch up to the market’s rapid-fire moves. We will discuss below whether the market has bottomed already or not, but this week’s record-setting rebound has reemphasized the importance of staying invested to participate in rallies.

The charts below show the year-to-date performance of the S&P 500, Nasdaq Composite and the Russell 2000 indexes.

 

 

 

 

We approached the market question here last week >>>> The Market’s Worst Days Are Behind Us

It is hard to know today with any degree of certainty whether we have bottomed already. As welcome as this week’s rebound is, it could very well be reflective of a sigh of relief at seeing the nation’s political leadership putting aside long-standing ideological differences to come up with a meaningful relief package.

The underlying problem that caused the market sell-off in the first place, the global pandemic, is not only very much with us at this stage, but also far from having peaked. I can see the market looking past through the pandemic and its associated economic impact after infections have peaked already.

I don’t think we are there yet. As such, I would expect some further downside risks in the coming days, particularly following this week’s impressive gains.

It is very difficult, if not altogether impossible, to perfect time the market. Instead of looking for that elusive market bottom, the best strategy for folks with a longer holding horizon is

to start accumulating small positions in quality blue-chip names that are now available at big discounts relative to where they traded just a few weeks back.

We have some tough times of us in the coming months as the U.S. economy adjusts to this new environment. It is reasonable to assume that many companies with stretched balance sheets may not make it to the other side of this outbreak. But we can say with a lot of confidence that many others will make it and it is these quality names currently trading at discounts that you should accumulating small positions for the long run.

2020 Q1 Earnings Season Preview    

The 2020 Q1 earnings season has gotten underway already, with results from 14 S&P 500 members with fiscal quarters ending in February out at this stage. We club these February-quarter results as part of our Q1 tally, with the full tally of these early reports reaching almost two dozen by the time JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) come around to report their March-quarter results on April 14th. We have another 7 S&P 500 members on deck to report results this week, including Walgreens (WBA - Free Report) and Constellation Brands (STZ - Free Report) .

Needless to say that this global pandemic is the biggest cloud on the earnings horizon, as it has such an overwhelming impact on the economic and operating environment in which these companies operate. All of the companies that have reported already mentioned the virus outbreak in their releases, with Nike (NKE - Free Report) ramping up its online sales in China in a major way as its physical stores became unavailable in that market.

The chart below shows how estimates for 2020 Q1 have evolved since the quarter got underway.

 

 

 

 

The pace of estimate cuts has accelerated in recent days, with the magnitude of cuts to Q1 estimates now larger than any other recent comparable quarter.

Estimates for 2020 Q2 have been coming down as well and now remain in negative territory, as the chart below shows.

 

 

 

 

The chart below looks at Q1 expectations in the context of what was achieved in the last few quarters and what is expected beyond 2020 Q1.

 

 

 

 

As you can see above, the first three quarters of 2020 are now in negative territory, with the last quarter as the only period with positive growth at this stage.

The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected next year.

 

 

 

 

It is reasonable to be skeptical of these consensus expectations given the all-around uncertainty about the economic impact of this outbreak. That will likely change only once visibility on containment of the pandemic improves, which will enable companies to get a handle on the full extent of their exposure and the pandemic’s macroeconomic impact.

For an in-depth look at the overall earnings picture and expectations for Q1, please check out our weekly Earnings Trends report >>>>Earnings Estimates Falling Sharply

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