First quarter earnings season will kick off this week with 40 S&P 500 Index companies slated to report results, including several of the biggest banks on Tuesday and Wednesday.

Analysts are calling for a roughly 10% year-over-year decline in earnings for the index, as shown in the LPL Chart of the Day, down from the 4% year-over-year increase expected as of January 1. Even the lowered forecast may prove optimistic given some analysts have not adjusted numbers since mid-March in response to the lockdowns in many major cities throughout the country.

The focus for investors this quarter will be on finding the floor for companies impacted by COVID-19, particularly those in the hardest-hit industries such as airlines, hotels, brick-and-mortar retail, and restaurants. That means management guidance will take on greater significance.

“First quarter earnings season is all about guidance,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “Forecasting has been somewhat of a guessing game with many companies pulling outlooks given the uncertainty, so investors will be looking for help developing credible scenarios depending on how long the stay-at-home orders remain in place.”

This environment will also provide an opportunity for some of the best positioned companies to shine. We would expect some of the best performers this quarter to come from the communication services sector, which includes several leading “stay-at-home stocks.” In response to the sector’s prospects, LPL Research upgraded its outlook to positive on Friday. Many consumer staples companies have benefited from shoppers stocking up. Healthcare spending is surging to combat the pandemic, which will help bolster the outlooks for certain companies in that sector. On the flip side, saying the quarter will be tough for energy producers is an understatement with crude prices having fallen more than 60% during the first quarter.

Given recent developments, our previous “base case” $158-162 per share estimate for S&P 500 earnings in 2020 appears too optimistic. Given the likelihood that a significant portion of the US economy will be shut down for at least another month, our bear case estimate of $138-142 in S&P 500 earnings per share (EPS), which would represent a typical recession haircut of about 15% from 2019 earnings, looks more reasonable. FactSet’s consensus estimate stands at $150.

While the COVID-19 hit to earnings is significant, the rebound after the economy reopens may be just as big. Massive stimulus will help bridge companies to the other side.

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