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Three Reasons Why the Coronavirus Economic Recovery will be Quick

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There is no question that the Covid-19 pandemic has pushed the U.S. economy into a severe downturn, ending the longest economic expansion in the nation’s history. All indicators suggest that this recession will be unlike any we have experienced in the past, with a sharp downturn in economic activities and employment, followed by a reasonably quick recovery.

There are three reasons why I am confident that the U.S. economy will quickly bounce back.

First, the U.S. economy entered this downturn in a very good shape, with consumer and business confidence and employment levels at or near record levels. The expansion preceding the downturn had been the longest in the nation’s history, but there were no visible and obvious imbalances or dislocations that are typically associated with the later stages of economic expansion.

For example, the last two economic recessions followed big bubbles in the housing and Technology sectors. The banking sector that got hit hard in the last recession because of housing exposure remains in excellent shape, with plenty of capital cushion to absorb the cyclical losses that typically incur during downturns (loan-loss reserves).

The Technology sector has emerged as the crown jewel of the U.S. economy, distinguishing the country from all other developed economies. In fact, many of the U.S.- based Technology firms like Alphabet (GOOGL - Free Report) , Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , Netflix (NFLX - Free Report) and many others have been critical to keeping all of us engaged and functional in these pandemic-driven shelter-in-place policies.

Second, this is no ‘normal’ recession that arrived as a result of imbalances in the economy or Fed action. External shocks can cause ‘normal’ recessions as well, like the one the western world experienced after the ‘oil shock’ of the early 1970’s or results from wars or other armed conflicts.

The Covid-19 pandemic is an external shock that is unique and without precedent, the last such calamity hit us literally a century ago.

The engineered economic shutdown pushed the economy into a recession, but it was a necessary act to slow the spread of the virus and reset human behavior. With most states at different stages of reopening their economies, we can expect economic activity to steadily start resuming. In this outlook, June will be better than May, with May better than April, which was most likely the downturn’s bottom.

The shelter-in-place pause of the last two months has trained us how to navigate this virus-infested environment as normal economic and human activities resume in the days ahead, even though a cure or vaccine is still some ways off. The ‘pause’ has undoubtedly been painful, but the generous policy response has more than made up for it.

Third, the policy response has been unprecedented, both in terms of size as well as reach. Actions by the U.S. Congress, the Treasury, and the Fed has ensured that short-term liquidity problems don’t become systemic solvency issues that will hobble the economy for a long time.

Congress may need to do more in the coming weeks and months, but the U.S. authorities’ whatever-it-takes attitude has provided the necessary bridge to the other side of this pandemic.

Full normalcy will only resume after we have a vaccine or cure, absent which economic activity in the leisure, hospitality and transportation areas will remain constrained. As such, I am not projecting the U.S. economy and labor market getting back to pre-Covid levels this year. That said, the worst of the Covid-driven economic pain is already behind us, with things steadily improving in the days ahead.

Five Charts About the Earnings Picture

The first chart shows how S&P 500 earnings estimates for full-year 2020 have evolved.

 

 

 

 

 

 

 

 

The second chart shows how S&P 500 estimates have evolved for the current period (2020 Q2), which is expected to be the downturn’s bottom.

 

 

 

 

 

 

 

 

The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next three quarters contrasted with actuals for the preceding five periods (including 2020 Q1).

 

 

 

 

 

 

 

 

The fourth chart provides a big-picture view on an annual basis.

 

 

 

 

 

 

 

 

As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.5% relative to the still-declining 2020 estimates. But as strong as next year’s growth estimate is, total index earnings would still haven’t gotten back to pre-Covid levels.

In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the fifth chart below shows.

 

 

 

 

 

 

 

 

 

These numbers translate to an index ‘EPS’ of $155.54 in 2021 vs. $122.93 in 2020 and $160.96 in 2019.

Q1 Earnings Season Scorecard

The Q1 earnings season has effectively come to an end, with results from 490 S&P 500 members already out. Total earnings for these companies are down -13.3% from the same period last year on +1.3% higher revenues, with 66.3% beating EPS and 57.6% beating revenue estimates.

We have another 5 S&P 500 members on deck to report results this week. This week’s docket includes results from chipmaker Broadcom (AVGO - Free Report) , Gap (GPS - Free Report) , Campbell Soup (CPB - Free Report) and others.

The comparison charts below put the results from these 490 index members in a historical context. The first set of two charts compare the earnings and revenue growth rates for these companies.

 

 

 

 

 

 

 

 

The second set compares the proportion of these companies beating EPS and revenue estimates.

 

 

 

 

 

 

 

 

The earnings growth comparisons start looking a lot better when seen on an ex-Finance basis, as the comparison chart below shows.

 

 

 

 

 

 

 

 

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Covid-19 & Corporate Earnings

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