What to learn from U.S. earnings week
Last week gave us a glimpse into the damage COVID-19 has inflicted, as companies reported earnings. Just as telling: With many businesses shut down or operating at reduced capacity and tens of millions of Americans out of work, the three of the biggest banks in the U.S. set aside nearly US$30 billion in the second quarter to cover the potential of bad loans.
Thanks largely to the funds set aside for bad loans, JPMorgan’s profit fell by half in the April-June quarter, Citigroup’s sank about 70%, and Wells Fargo reported a quarterly loss. Wells Fargo also cut its dividend to 10 cents from 51 cents. While the monies are still on the balance sheets, loan loss provisions directly reduce the earnings in the quarter.
In earnings calls, CEOs offered a more sombre tone than in recent months:
“Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.” –Charlie Scharf, Wells Fargo CEO
“The pandemic has a grip on the U.S. economy and it doesn’t look like things will get better until a vaccine is available.” –Michael Corbat, the CEO of Citigroup
But there were also positive earnings announcements.
In the healthcare sector Abbott Labs and Johnson and Johnson beat estimates. Even Domino’s Pizza saw earnings and revenues rise above expectations. Investment bank Morgan Stanley had an incredible quarter seeing revenues and profits increase greatly compared to the same quarter of 2019. Goldmans Sachs had a strong quarter based on investment banking results.
There is certainly some positive momentum in many areas. But as the bank CEOs warn, the economic recovery will be an incredible challenge. Still, stock markets continue to rise as investors focus on the positive news.