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FEBRUARY 11, 2020

Q4 Earnings Review: One risk "traded" for another

At the beginning of the fourth quarter the market remained fixated on the trade war, which had been the focal point for much of 2019. Talk of a phase one deal with China started to calm frayed nerves and, was it not for the sudden coronavirus emergence, the improving economic outlook and reduced tariff impact would have likely been the primary focus of company earnings calls this quarter. With 61% of S&P 500 companies having reported through February 6, fourth quarter results are again following the typical path – revised down initially and then broadly exceeding expectations when officially announced. At the beginning of 2020, S&P 500 fourth quarter earnings were expected to decline 0.3% year over year according to Refinitiv. Now they are poised to advance 2.1%. This is a result of companies exceeding (reduced) expectations by a healthy 5.2%.

Looking forward, Wall Street consensus earnings estimates for first and second quarter seem achievable, projecting only mid-single digit growth (Chart 1). However, it is important to note that the coronavirus remains a wild card. Most companies are hesitant to estimate the potential financial hit of the virus, since the quarantine duration is unknown. Looking forward to the third quarter, however, analysts again expect growth to accelerate towards a more robust double digit level. Though if recent history is a guide, it is reasonable to think those numbers will fall slightly before we reach reporting season.


As to specific coronavirus disruptions, many firms have shared some detail on their conference calls. For example, Royal Caribbean projected the current cost of canceled or changed sailings to be 2.4% of 2020 EPS, and this number is expected to grow. Turning to Disney, they have shut their Shanghai and Hong Kong theme parks; and if both are closed for two months it would equate to 1.1% of 2020 income. For companies in the S&P 500, the semiconductor and semiconductor equipment industry has the highest direct exposure to China and Hong Kong at almost 30% of sales (Chart 2). Key firms in this space include KLA Corp (KLAC), which has said they expect longer than normal Lunar New Year plant shutdowns to hit March quarter earnings, but that the full year virus impact will be limited. This is in line with broader trends, as investors and analysts seem to be categorizing the outbreak as a transitory downturn that will recover over the course of 2020.



To sum up, the coronavirus is a new risk, and great efforts are underway to contain the disease. The possibility of a large negative scenario is heightened, and will remain more prominent than usual until the outbreak subsides and China’s manufacturing sector returns to more normal activity levels. In the meantime, solid fourth quarter earnings results have provided a supportive backdrop for equities and dovetails with our case for continued global expansion.



This is part 3 of the 2-part series on 2019 quarterly earnings 4

When we previewed fourth quarter earnings season in January, very few peop…

April 14, 2020

Third quarter earnings season is wrapping up and results were strong enoug…

November 12, 2019 Yung-Yu Ma, Ph.D.
Current Market News: Q4 Earnings Review - One risk "traded" for another
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