Cue the Lightning, This Earnings Disaster Movie Isn’t Over Yet

(Bloomberg) -- With 2020 looking comparable to the disaster movies of the 1970s, it's time to assess where we are in the plot for corporate America: The skyscraper is still smoldering, the cruise ship is still capsized, the earth is still rumbling with aftershocks. Some members of the star-studded cast haven't survived; the rest are battered and bruised. No one has fully emerged into clear sunshine.

Such is the rhythm of the current earnings season, where each day's report has revealed more about how nature -- in this case, a virus -- can expose humankind's hubris and failure to plan, while also inflicting random damage.

The weakest companies, including J.C. Penney, Ascena Retail Group and Briggs & Stratton, have succumbed to bankruptcy protection. The strong are emerging, with United Parcel Service and Amazon.com benefiting from soaring demand for online deliveries. But most are just looking for ways to survive with fewer businesses, products or workers -- and making no promises on future profit or sales.

“We knew this would be a long, sawtooth slog with a lot of unexpected twists and turns, and it's proving to be so,” Gary Kelly, chief executive officer of Southwest Airlines Co., told analysts July 23. Until the virus is defeated, “everybody needs to understand that we know enough now to know that we have a long, long way to go.”

One frequent theme among companies that have reported so far -- that April was the worst month of the worst quarter -- reflects the lockdowns that froze wide swaths of the economy in most major U.S. cities. Supporting a subplot that things are still very shaky, only about 20% of the companies that usually provide financial guidance along with second-quarter earnings reports have done so this time around.

Earnings Results

With more than half of the Standard & Poor's 500 companies reporting so far, earnings have plummeted by about 34% from the year-earlier period, according to data compiled by Bloomberg.

The companies reporting losses include some of America's best-known names: General Motors, General Electric, Starbucks, Nike, Twitter. While few industries are spared, the devastation is most evident in aviation, travel and aerospace, where United Airlines, American Airlines, Boeing, Delta Air Lines, and Expedia account for the five biggest losses on a per-share basis.

“While we were encouraged by the early signs of recovery, the past few weeks demonstrate the trajectory may be uneven,” Boeing CEO David Calhoun said this week. Airline passenger volumes dropped 94% in April, and while he noted signs of recovery in China and Europe, U.S. demand has sputtered after a recent uptick in Covid-19 cases.

The news, of course, isn't all bad. Efforts to reopen the economy took hold in May and June -- possibly too soon, based on the new surge in cases across the Sun Belt and West -- and about 85% of companies reporting so far were able to beat analysts' severely lowered earnings estimates.

All major U.S. stock indexes have risen in July, with investors largely willing to overlook the miserable quarter and lack of specific guidance while taking heart from promised cost savings. Boeing, for example, said it's going to shed 19,000 workers this year and slowed its production rate. McDonald's axed its all-day breakfast menu and plans to sell a big chunk of its business in Japan to raise cash. Avis Budget Group shares soared after the rental-car company cut expenses by reducing the size of its fleet by 26% -- or 100,000 vehicles -- and canceling orders for another 185,000.

Tech giants Apple, Facebook and Amazon, meanwhile, have benefited from demand for staying connected and entertained during the pandemic, pushing the Nasdaq 100 to its fastest rally in two decades. The index jumped an additional 1.4% on Friday after a barrage of tech industry earnings reports showed how the industry is thriving, and Charter Communications jumped on a surprising gain in TV and internet customers.

Plot Thickens

Whatever cautious optimism the earnings reports project, a more somber note is being sounded by two of the nation's top bankers: JPMorgan CEO Jamie Dimon and Federal Reserve Chairman Jerome Powell.

Government officials reported Thursday that gross domestic product shrank the most on record in the second quarter -- a jaw-dropping 32.9% when annualized -- and 17 million Americans claimed state unemployment benefits in mid-July.

Dimon said the trillions in federal aid injected into the U.S. economy to help companies and the unemployed made it hard to gauge the true depth of the recession. One distortion, he said, is that up to 70% of laid-off workers made more money because of temporary federal payments than they did at their jobs. And housing prices are rising, something also not seen during a traditional slump, as rock-bottom interest rates fuel purchases.

“You will see the effect of this recession -- you're just not going to see it right away because of all the stimulus,” Dimon told analysts July 14.

Powell, warning of the worst economic downturn in our lifetime, said the Fed will use all its tools to support a recovery, in part by keeping interest rates near zero, but the situation is still unstable.

“The path forward for the economy is extraordinarily uncertain, and will depend in large part on our success in keeping the virus in check,” Powell told reporters on July 29. “We have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity.”

Under such circumstances, it might pay to remember “The Morning After,” the Oscar-winning theme song for 1972's “The Poseidon Adventure.” While marking the triumphant end of disaster it contained an important caveat: “There's got to be a morning after -- if we can hold on through the night.”

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