With 4Q19 EPS Season Mostly Behind Us, Will Coronavirus Let Investors Focus on ‘20 Growth?
February 21, 2020

In this strategy briefing…

FSInsight Investment Views

Near Term View: PMIs recovering, Inventory cycle bottoming, 2020: “E” matters more than “P/E”
‘20 Target: 3,450 (YE P/E 17.9x · 2021 EPS $193)
Style: Cyclical + Value

The Wall Street Debrief

Vito J. Racanelli
Formerly a Senior Writer at Barron's, where he covered stocks, bonds, and financial markets.

With 4Q19 EPS Season Mostly Behind Us, Will Coronavirus Let Investors Focus on ‘20 Growth?

In the minds of investors, the soon-to-end fourth quarter earnings reporting season has taken second place—if not all but ignored seemingly—to the deadly outbreak of the coronavirus in China. That’s unsurprising, given the DefCon 1 level of fear that disease has engendered. But we’re not doom and gloom types here. I expect the spread will be contained and we won’t see another 1918 Spanish flu. (Fingers crossed.)

The concern about coronavirus has overshadowed what’s turned out to be a fourth quarter among the companies in the Standard & Poor’s 500 index (SPX) that is better than expected, with the great majority of the companies having reported already by now.

For example, according to FactSet, to date, 77% of SPX firms have reported actual results for Q419. In terms of earnings, the blended EPS growth rate (which combines actual results for companies that have reported and estimated results for companies that have yet to report) for 4Q is positive at 0.9%. This has steadily improved since the -2.4% expected when the reporting season kicked off. Similarly, over the same period, blended revenue growth is 3.6%, above the 2.8% expected a few weeks ago.

Zack’s Investment Research, in a recent report, said that “we can say with a fair amount of confidence that the Q4 earnings season has turned out to be a good one, with decent momentum on the revenues side and earnings growth on track to turn positive.”

Zack’s adds that in general a much bigger proportion of SPX companies are beating top-line estimates, even as the EPS beats percentage is tracking below historical periods. Additionally, the 4Q estimate revision improvement trend is easing, and that could be due to coronavirus fears. The outbreak has clear negative earnings implications, as many companies like Starbucks (SBUX), Disney (DIS), and Pernod Ricard, among others, have publicly acknowledged.

Second, profits growth is tracking to turn positive in 4Q. That’s something we can see from the FactSet numbers. (It should be noted that the two data providers don’t always present the quarterly earnings in the same way.)

And while we are looking at what’s likely to be flat SPX EPS in 2019 from 2018, at $162, investors should remember that 2019 results are being compared to strong 2018 earnings, a year in which the Trump corporate tax rate reduction took effect and rained artificially high profits on companies. Ironically, the market fell on a price basis in 2018 but soared nearly 30% last year, when earnings growth was nil.

What’s also notable about the fourth quarter is that it’s the first one in 2019 in which results turned positive for the period. In the previous three quarters of 2019 results did improve compared to estimates as the reports came in but remained in negative territory. Remember the so called “earnings recession?”

While things should normalize this year and we’ll get to that below, investors should expect that when the outbreak is finally called “contained” the pressure on earnings for a number of industries, restaurants, airlines, luxury companies, to name a few, as well as companies based in or with a big presence in Asia will likely be hit in the first quarter of 2020. You can expect that, for example, China’s Alibaba (BABA), travel operators TripAdvisor (TRIP) and Expedia (EXPE) will see a hit to profits. Unfortunately, it will take time to assess the full extent of the virus. This might manifest itself in stock price pressure. Will this be a one quarter phenomenon—1Q20—or will it bleed into the second quarter or later of this year? I think the former, but it is hard to tell.

A big bright spot in the fourth quarter is technology, a sector we happen to like a lot. In general, with the great majority of tech companies (by market capitalization) having reported, total earnings (or aggregate net income) are up roughly +5.5% from the same period last year on about 6% higher sales, according to Zacks. Over 80% of companies are beating both EPS and revenue estimates. This is a notable improvement in performance versus the previous three quarters of 2019.

Looking ahead, FactSet says that analysts see earnings growth of 2.5% to 5% for Q1 2020 and Q2 2020. The broad market is trading around 19 times this year’s bottom up EPS estimate of $177 and 17 times next year’s $195.

So, what about 2020? Our very own Tom Lee makes a good case for U.S. growth to begin reaccelerating later in 2020. As we’ve noted previously, three factors suggest this: the US Purchasing Managers Indexes are bottoming, key groups sensitive to PMIs are rallying, and ISM New Orders/Inventory looks like it has bottomed.

The market closed Friday around 3338, up 3.3% YTD and we see further upside ahead.

Questions? Contact Vito J. Racanelli at or 212 293 7137. Or go to

signature of Vito J. Racanelli
Vito J. Racanelli, Managing Director, Senior Editor and Market Intelligence Analyst

Tom Lee's Equity Strategy

Tom Lee
Previously Chief Equity Strategist at J.P. Morgan from 2007 to 2014, top-ranked by Institutional Investor every year since 1998.

Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS

In a press release on Monday, Apple noted that March guidance would change. The primary reasons for this change? In short, coronavirus. Manufacturing issues are expected to constrain iPhone supply and retail store closures will dampen demand.

While the ultimate economic impact of the coronavirus remains largely uncertain, these issues faced by Apple are expected to affect a broad swathe of S&P 500 companies.
With this news, we can make a first ‘stab’ at virus’s impact on S&P 500 1Q2020 EPS.

• Sell-side analysts cut AAPL EPS forecasts by ~$0.15 this Monday morning (their best guess), which translates to a ~$650 million impact on $12.5 billion of quarterly net income, or roughly 5%.

202002221 Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

• Assuming a 5%, 10% or 15% impact on 1Q2020 EPS for those exposed (50% of the S&P 500 per our estimate), this implies $1.00 to $3.00 of total negative impact on S&P 500 EPS per our analysis (see below).

While I see an impact to earnings for Q1, I also expect that there will be a snap back of activity post-Corona. Hence, I expect the $1.00 to $3.00 of negative EPS impact to be fully recovered in 2H2020 EPS. The fact that the earnings impact could be -$8 billion to -$25 billion also points to increasing likelihood of fiscal stimulus from US, China, Japan and Europe, a major reason why investors should not get too negative.

Within domestic markets, the impacts are expected to be felt most sharply by multinationals and exporters and concentrated in 1Q and tapering off in Q2.

202002222 Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

The hit to European and Asian companies should be far larger as percentage of net income. Thus, the global “safety trade” means even more inflows into US equities. And, as we have previously stated, there is just not enough S&P 500 to go around ($300tn of global household liquid assets vs $25tn of S&P 500 market cap). We suggest sticking with our “Granny shots” stocks and the leaders of this market: Technology and Healthcare. Technology and Healthcare are accounting for about 70%-75% points gained YTD (see chart below).

202002223 Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg

What could go wrong? Corona virus is largely a China-centric health story. This could spread to Europe and possibly the US which would result in a larger hit to earnings than our $1.00-$3.00 estimate.

Bottom line: AAPL is giving us the first hints of what we can expect for 1Q2020 and it should be sloppy. This is not a thesis killer for our 2020 equity outlook as we do not see the competitive position of AAPL or US-tech companies weakening. These are issues facing all global companies. But in the myopia of market consensus thinking, this downward cycle of 1Q2020 EPS estimates will be a short-term headwind. In other words, expect a lot of negative chatter in the next few weeks.

Figure: Comparative matrix of risk/reward drivers in 2020
Per FS Insight

202002224 Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS

Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019

202002225 Apple “Coronavirus Hit” provides hints for 1Q 2020 EPS
Source: FS Insight, Bloomberg
signature of Tom Lee
Tom Lee, Head of Research

Fed Watch

PBOC could be shifting to more accommodative policy

The FOMC released its minutes from the January 28th/29th meeting last week, and as expected, coronavirus is not a needle mover at this point. While the virus has been added to the Fed’s list of risks to the global growth outlook, it warrants “close watching” rather than an immediate policy response. In other words, don’t expect another “insurance cut” like we saw in 2019. Any policy response to the coronavirus threat we’d see will likely be reactive rather than proactive.

While the Fed pursues its “wait and see” approach, The People’s Bank of China (PBOC), unfortunately, does not have the same luxury. On February 20th, the PBOC cut its benchmark 1-year Loan Prime Rate (LPR) by 10bps and its 5-year LPR target by 5bps.

On one hand, these cuts are nominal. Can a 5bps -10bps rate cut really provide much stimulus to the Chinese economy over the short term? I don’t think so. On the other hand, when taken in conjunction with the PBOC’s $170bn liquidity injection on Feb 2nd, these cuts could represent a shift towards more accommodative policy by the PBOC, one of the only major central banks with substantial room for further cuts.

On the balance sheet front, the minutes noted that the Fed’s treasury bill purchases will continue to the tune of $60bn per month until at least the start of Q2. Estimates suggest that after April 2020, the purchases will have restored the permanent base of reserves to September 2019 levels. If history provides any insight, expect the Fed to tread lightly when scaling back these purchases. Here are two main reasons why:

First, the 2013 “Taper Tantrum” clearly demonstrated that putting assets up on the Fed balance sheet is much easier than taking them off; both from a market and political standpoint. The 2013 Tantrum commenced in earnest when former Fed Chairman, Ben Bernanke, mentioned that the Fed could begin scaling back asset purchases in May 2013. It wasn’t until 5 meetings later, in December 2013, that the Fed a began scaling back monthly asset purchases ever so slightly from $85 billion to $75 billion per month.

Second, the Fed essentially got it wrong in 2018. Of the four rate hikes executed in 2018, three were quickly unwound in 2019. If the Fed prematurely halts asset purchases, they run the risk of “making the same mistake twice”. Legacy does matter when it comes to making policy decisions, and Fed officials would be wise to carefully assess the impact of halting purchases.

The CME Fed futures market, historically a good indicator of rate trends, puts a 10% rate change probability (reduction) in March. The U.S. Treasury 10-yr note yield was around 1.47%, down from 1.58% last week.

Upcoming: 3/17-18 – FOMC meeting. No action expected.

GRANNY SHOTS: Best bets in 2020

GRANNY SHOTS: Best bets in 2020 - Week 8

Below we’ve highlighted stocks that we recommend across at least two of our investment strategies for 2020. These companies could benefit from multiple themes and secular tailwinds – clear picks in our view for the first half of 2020.

Figure: Granny Shots are the “best of the best”
Stocks which appear in multiple themes. Source: FS Insight

With 4Q19 EPS Season Mostly Behind Us, Will Coronavirus Let Investors Focus on ‘20 Growth?

Figure: Granny Shots Portfolio Performance
Monthly. Source: FS Insight. FactSet as of 2/20/20.

With 4Q19 EPS Season Mostly Behind Us, Will Coronavirus Let Investors Focus on ‘20 Growth?

Figure: Intersection of investment recommendations by strategy
As of 2/20/20, source: FS Insight, FactSet

With 4Q19 EPS Season Mostly Behind Us, Will Coronavirus Let Investors Focus on ‘20 Growth?

The stocks in the Granny Shots portfolio collectively outperformed the S&P 500 by 1,560 bps since its inception (S&P 500 is up 29.9% during the same period).

Technical Strategy

Robert Sluymer
Former Managing Director leading RBC’s U.S. Technical Research team with over 26 years of expertise in investment research and technical analysis.

Equities Continue Their Normal Pause; EBAY Looks Attractive

Equity markets continue to track a normal intermediate-term pause following the Q4 surge – The technical backdrop remains unchanged despite growing worries of the economic impact of the coronavirus. The S&P 500 remains above key trend support defined by its 15-week moving average near 3240 as weekly momentum indicators, tracking 1-2 quarter shifts, continue to unwind from overbought levels established in early Q1. In effect, the weekly rate of change over the past 3-5 months continues to decelerate for the S&P 500 and has turned negative for more cyclical markets, such as EAFE, EM and the Russell 2000 along with the financial, industrial and resource sectors. However, while the weekly momentum for most equity markets has peaked, the absolute price profiles of these markets remain relatively well behaved in broad trading ranges that are holding above key support levels. At this point, we continue to view the recent market volatility as a normal multi-month consolidation following the impressive surge in Q4.

Beyond equity markets, we are seeing mixed signals as rates continue to decline, Oil and Copper bounce, and the USD surges – The decline in US 10-year rates and strength in the USD DXY index continues to signal that markets are in a risk off mode.
However, in contrast to rates, WTI Oil has bounced from deeply oversold levels back above a key support band between $50-52. Likewise, Copper has rebounded back above its key support band between Comex $245-250. While the near-term strength in both Oil and Copper may simply prove to be an oversold bounce, it is a noteworthy silver lining that both have rallied against the backdrop of surging US dollar. Lastly, lumber, as one barometer for US domestic activity, continues to rally from the 16+ month base it cleared earlier this month.

202002221 1 Equities Continue Their Normal Pause; EBAY Looks Attractive
Source: FS Insight, Bloomberg

EBAY – Bottoming at long-term support at its 200-week moving average – This week’s chart of the week is eBay (EBAY) which is attractive following a pullback to long-term support at its rising 200-week moving average. Relative performance versus the S&P

500 (bottom panel) has been weak through 2H 2019 into Q1 2020 but is showing early signs of turning up and weekly momentum (top panel) continues to build to the upside. In contrast to many of the leading but now well advanced and potentially stalling Software stocks, EBAY is a timely buy candidate to accumulate at current levels. Lastly, EBAY ranks positively on our Global Asset Allocation Strategist’s (Brian Rauscher) Earnings Revision Model (ERM) for those looking for more fundamental support.

202002222 1 Equities Continue Their Normal Pause; EBAY Looks Attractive
202002223 1 Equities Continue Their Normal Pause; EBAY Looks Attractive
signature of Robert Sluymer
Robert Sluymer, Managing Director and Technical Strategist

US Policy

L . Thomas Block
Formerly Global Head of Government Relations at J.P. Morgan for 21 years, and previously served as Legislative Assistant and Chief of Staff in the House, and Legislative Staff Director in the Senate.

Poor Showing for Bloomberg Keeps Door Open for Biden

Wednesday’s Democratic Presidential debate was highlighted by the poor performance of Mayor Mike Bloomberg. As someone who has prepared candidates for debates, it seemed to me that Bloomberg just had not spent the time to adequately prepare. The questions that came in his direction were very predictable, but the Mayor did not have strong, coherent answers.

His poor performance may have burst the hope that some moderates had that he would sweep in with his unlimited pocketbook and save the party from Senator Sanders. The ray of hope for Bloomberg is that he is not on the ballot this weekend in Nevada. He will get another chance on the debate stage next week, and he still has ten days to right the ship before the Super Tuesday vote on March 3rd.

The strong attacks on Bloomberg by all the other candidates demonstrate just how far to the left the Democratic Party has moved, to the point where there arguably is no room for an ultra-wealthy candidate.

Senator Elizabeth Warren, in a last-ditch effort to save her campaign, ripped into Bloomberg with an especially sharp exchange on his reported treatment of women.
While proclaiming herself a capitalist in comparison to Sanders’s socialism, she still occupies the progress lane to the nomination. It is hard to see a game plan where she dislodges Senator Sanders from his role as progressive leader.

Bloomberg’s poor performance gives Vice President Joe Biden a little room to come back into contention. There will eventually be a leader of the moderate wing to challenge Sanders, and if he does well enough in Nevada so as not be embarrassed, he can hope to have a strong showing next week in South Carolina. If Biden wins South Carolina, he can stay alive to fight as the moderate leader on Super Tuesday.

With all the focus on the Presidential race, little is happening in Congress. The President’s team continues to put out stories calling for a new round of tax cuts, but the chances of that happening in the Democratic House are close to zero. Once the Democrats agree on a candidate, that person will become the titular head of the Party and perhaps some issues can be addressed or at least get a budget agreement to forestall a government shutdown on October 1.

Figure: Top Trump Tweets

202002221 2 Poor Showing for Bloomberg Keeps Door Open for Biden
signature of L . Thomas Block
L . Thomas Block, Washington Policy Strategist
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