As the first quarter earnings season get underway, I am reminded of the phrase “the king is dead, long live the king!” This quintessential Wall Street process gives investors a chance to evaluate the financial health and operational success (or failure) of companies for the last three months as well as for the next couple of quarters.
Like many other aspects of life, this earnings season will be different in a post COVID-19 crisis. Some companies will most likely post disappointing results, and others have already pulled any guidance altogether. As most of you may have seen already in our webcasts or client meetings, we built an earnings framework to understand the impact the economic shutdown will have on company earnings for the next few years.
The bottom line is earnings for 2020 are no longer relevant. Investors and asset managers are looking at 2021 and 2022 earnings for a resumption of economic recovery and a window into what normalized earnings may look like…”2020 earnings are dead, long live 2021 earnings!”
To make the process of using this earnings season in an effort to build the future value of stock prices even harder, investors also must account for a “new normal” interest rate and commodity price world. On a positive note, we continue to have conviction that active strategies may be in a good position to take advantage of an environment that rewards quality companies.
All this to highlight that we continue to advocate for investors not to try to time the market and that we should expect the economy and the stock market to ebb and flow over the next few months, even possibly into 2021.
We have a checklist to help us evaluate how indicators such as earnings, money flows, fixed income spreads, valuation metrics, and economic data either improve or deteriorate as we reopen our economy. There is no one thing we look at to decide allocating capital, but a debated, consistent, and well-thought out plan.
If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler, or myself. Your Sendero team is ready to help.
Amaury de Barros Conti