As U.S. companies gear up for what may be the gloomiest reporting period since the financial crisis, the consumer staples, healthcare and technology sectors could be comparative bright spots.
Most sectors are expected to bring dire news this earnings season in the wake of the U.S. coronavirus outbreak, which has produced the most cases of any country. Economists widely expect a severe economic downturn as a result.
Given the outbreak is expected to have hampered a broad swath of the economy in the first quarter, analysts are forecasting an 8.1% drop in earnings from the previous year, down from estimated profit growth of 6.3% at the start of the year, according to IBES data from Refinitiv. That would be the biggest earnings decline since the third quarter of 2009, when profits fell 14.7% from a year earlier.
Moreover, a number of companies have pulled guidance for the quarter, raising worries that analysts' forecasts for the period may underestimate the extent of the fallout from the virus.
The energy, consumer discretionary and industrials sectors have been cited for the biggest declines in forecasts since Jan. 1, and investors have been bracing for especially poor results from travel, entertainment, energy and discretionary companies in general.
The S&P Composite 1500 airlines index, for instance, remains down 51.8% since Feb. 19, when the benchmark S&P 500 ended its nearly 11-year bull market and coronavirus fears sparked a deep sell-off on Wall Street. The S&P 500 is down 17.6% since that date.
Estimates for technology, communication services, health care, consumer staples and utilities have fallen as well, but all of those sectors still are expected to post some profit gains for the quarter, based on Refinitiv's data.
Analysts see quarterly earnings in the technology sector up 2.6% from 2019, communication services up 7.8%, utilities up 2.3%, healthcare up 1.6% and consumer staples up 0.9%.
Technology's relatively high cash balances and lower debt make it "a rare cyclical safe-haven," said Daniel Morgan, vice president and senior portfolio manager at Synovus Trust Company in Atlanta, Georgia.
That is due in part to software spending, which has been resilient, said Morgan, who lists Microsoft (MSFT), Nvidia (NVDA) and Citrix Systems (CTXS) among his top 10 picks of stocks likely to hold up better than others this earnings season.
"You're going to continue to see companies trying to streamline to become more productive. That trend to me is still intact," he said.
Morgan also likes stocks in health care like Regeneron Pharmaceuticals (REGN) and in staples, such as Clorox Co. (CLX).
The rush to stock up on household items like toilet paper and cleaing materials has driven up shares of staples companies since the outbreak, which began in China late last year and then spread through Europe and the United States.
"Kimberly-Clark is the one that leaps to mind," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh, referring to companies that have held up. Shares of Kimberly-Clark Corp. (KMB) surged following the outbreak but are down 8.5% since Feb. 19.
To be sure, some companies whose shares have outperformed may end up reporting lackluster reports. That is especially a hazard for grocery chains, according to Forrest. "The stuff that people are snapping up is the low-margin stuff. Revenues will be higher, but Wall Street likes earnings," she said.
Shares of Gilead Sciences (GILD) and Regeneron (REGN), which are developing potential treatments for COVID-19, the disease caused by the novel coronavirus, have performed particularly well.
The S&P 500 healthcare index is down less than 9% since Feb. 19.
The week brings results from JPMorgan Chase (JPM) and other big banks, but also from some names in healthcare, including Johnson & Johnson (JNJ) and Intuitive Surgical (ISRG), while reports are due from International Business Machines (IBM) and Procter & Gamble (PG) the following week.
Goldman Sachs strategists, who are expecting a 15% year-over-year decline in first-quarter S&P 500 earnings and a 33% decline in 2020 earnings, wrote that they expect profits in defensive sectors such as consumer staples, health care and utilities to be insulated relative to most cyclical sectors.
In addition, they said, "we expect Info Tech EPS will fall by less than the broad index in 2020, given the high share of recurring revenues for some of the largest stocks."
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