First Quarter Earnings Were Terrible, But Executives Offer Some Hope

First Quarter Earnings Were Terrible, But Executives Offer Some Hope


Companies releasing first-quarter results in recent weeks have detailed how the coronavirus pandemic is crushing their business, and many have gone so far as to stop offering forecasts for the rest of the year, claiming the future is just too uncertain.

Still, that didn’t stop some companies from pointing to glimmers of hope. Some senior executives said that business in April was slightly better than in the dark days of March as the virus quickly spread, leading to the deaths of thousands of people in the United States. Others tentatively outlined what a post-pandemic recovery might look like by pointing to how things were going in China, where the pandemic started and has since ebbed.

These shreds of optimism may have been an exercise in corporate spin, meant to reassure shareholders — or to tell them something many investors already appear to believe. The stock market has rebounded 27 percent from its March low as investors have become confident that the Federal Reserve and the Treasury Department will prevent the economy from going into a tailspin.

Though the most recent earnings reports were pretty awful, stocks did not crater, in part because Wall Street is expecting earnings to bounce back quickly. While analysts at Goldman Sachs expect the combined profits of S&P 500 companies to fall by a third this year, they expect them to surge next year to a level that exceeds what the companies made in 2019.

Government statistics and independent analysts paint a more dire picture. Economists expect the April unemployment rate to have hit about 16 percent, one of the highest on record, and up from 4.4 percent in March. Most importantly, the chances of an economic resurgence rest largely on whether the coronavirus pandemic will be contained as lockdowns are relaxed and not flare up again.

It is important to keep in mind that large companies, through hiring and investment, play a big role in the economy. Once big companies like Google, Ford Motor and Apple are confident about a recovery, their spending could make it so.

“The overarching theme is uncertainty,” said David Lefkowitz, an equity strategist at UBS Wealth Management. “That said, most companies are thinking the economy will reopen in stages, and on a region-by-region basis.”

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Starbucks, for example, suspended its companywide profits forecast, but provided a bullish prediction about its business in China, where pandemic lockdowns are being lifted and nearly all its stores have reopened. The company says China could offer lessons about what might happen in the United States.

The coffee chain, which has long billed itself as a hub for social interactions, is expecting sales in China for the three months through the end of October — its fiscal fourth quarter — to be roughly in line with the same period in 2019. In the three months through the end of March, sales were down by half compared with the year-ago period. “We are leveraging our experience in China to inform our actions in other markets, including the U.S.,” Starbucks said in a statement.

Other executives are also seeing signs that customers want to get back to old habits. The chief executive of McDonald’s, Christopher J. Kempczinski, said there was a three-hour wait at one of its restaurants in France when it reopened. But overall, he sounded cautious on last week’s earnings call. “The exact trajectory of our recovery, however, is highly uncertain and dependent on many factors outside our control, such as government mandates, the risk of a second wave of infection to the availability of testing and the overall economic backdrop,” Mr. Kempczinski said.

He is hardly the only corporate executive who is unwilling or unable to predict when business will pick up.

Of the roughly 300 companies in the S&P 500 stock index that regularly provide an earnings forecast, 114 have not provided one for future profits, according to Savita Subramanian, an equity strategist at Bank of America Merrill Lynch. “A lot of corporates are using this as an opportunity to essentially go silent,” she said, “No one knows when we’re going to come back on line.”

Even Apple, one of the most profitable companies in the world, declined to provide a forecast.

Of course, for companies in the hardest-hit industries like airlines and logistics, the downturn could last a while and sales will not quickly snap back. “Historically, it has taken years, typically five or more, for business travel to recover,” Gary C. Kelly, chief executive of Southwest Airlines, said last week. Southwest was one of the companies that did not provide an earnings projection. Stock analysts expect the company to lose $3.86 per share this year, a sharp swing from a profit of $4.27 per share last year.

And FedEx might not report profits that match its 2019 haul until 2024, according to analysts that cover the package delivery giant. This would not be without precedent. After the financial crisis, Fedex’s earnings took seven years to return to their pre-2008 level. Unsurprisingly, FedEx has also stopped providing an earnings forecast.

In tough times, companies, hoping to conserve cash and shore up profit margins, cut spending in ways that can weigh on the economy. Ford has been doing that in China, including laying off thousands of workers. “The stark reality of a protracted global shutdown of our sector and our vertical has forced a laser focus on cost and liquidity,” James D. Farley, Ford’s chief operating officer, said last week. “And just as we did in China, we have ratcheted down spending across the board, both fixed and variable.”

Even Google, which has done relatively well during the pandemic, said it was paring the pace of its hiring.

Spending on new plants, buildings and technology, which can give a big lift to other parts of the economy, is another budget item that is getting chopped — even at technology companies that are profitable and have tens of billions of dollars in the bank. ­Facebook said last week that it expected capital expenditures this year of $14 billion to $16 billion, down from an earlier forecast of $17 billion to $19 billion.

Still, one promising sign highlighted by some executives is that the economy might quickly hit bottom, or may already have done so. In other words, things are bad but they don’t seem to be getting worse.

Mastercard, for example, said that U.S. transaction volume in the week ended April 21 was down 15 percent from the same period in 2019. Ordinarily that would be considered disastrous but it was an improvement from the 26 percent decline the week before.

“We believe we are currently in the stabilization phase in most markets,” said Ajay S. Banga, Mastercard’s chief executive, said last week.

Even companies in the health care sector, which is playing a central role in the pandemic, are hoping that conditions will return to normal in the coming weeks.

The pandemic has weighed on HCA, which operates over 300 hospitals and surgery centers. Many of them are in Texas and Florida, which have begun to open up. The company has said that elective surgeries, generally more profitable than other types of care, have been put on hold. But HCA’s chief executive, Samuel N. Hazen, told investors last month that its “reboot phase” would be finished across most of its operations by the end of June, and said the company is taking steps to make sure patients feel safe in hospitals, clinics and other health care facilities.

When asked by an analyst during a conference call, Mr. Hazen seemed upbeat about the loosening of lockdowns. “We’re excited about the reopening in Texas,” he said. “We’re excited about Tennessee, and we anticipate other states starting to relax some of these procedures and policies.”

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