Q2 Earnings: Volatility Incoming

In January, I told you to rebalance to reduce equities. In March, I told you to rebalance to get longer equities. Today I’m telling you to make sure you rebalance again. Q2 Earnings Season is likely to cause a lot of volatility.

Why? Because analysts and the market really have no idea what earnings are going to be.

Here’s a chart showing the expected change in earnings over time from Factset Insight.

While you may look at the total lack of change since May as evidence we know EXACTLY what is going to happen, it’s really the opposite!

Most firms pulled guidance for the year. So analysts have nothing to go on. That will make earnings even more volatile than normal.

Given the market is close to all time highs, I think the “whisper” earnings expectations may be a little high for the rest of 2020 and 2021, which could led to a pullback. Especially in names with nosebleed valuations.

Party Like It’s 1999

Another week has gone by. The market is up, earnings estimates are down. Here’s an updated graph for Forward Price-to-earnings ratio, where you can see we are partying like it’s 1999.

Forward P/E ratio

You can forward P/Es continue to increase. This is because the market is increasing, all be it not that much. The real issue is that earnings estimates for the year continue to decline. Expectations are earnings for the year will now decline 20%.

The bottom line is this market is not cheap on a P/E basis.