Is Covid-19 priced in the market?
After the fastest correction in financial history, some financial markets are technically back in the bull market after a rise of about 20% in the last 4 weeks. The question is whether the crisis is a temporary growth shock and whether companies will show profit growth again in 2021. Or whether it is a ', V-,U-, L- or W -Shape Recovery '' and the major distortions caused by the oil price, demand shock and rescue programs of central banks and governments will affect global growth in the long run. According to the Refinitives S&P500 Earnings Dashboard of April 16, 2020, earnings estimates for the S&P500 are -13.6% for 2020 and +22.8% for 2021, indicating a V-shape recovery. The index is trading with a forward PE of 18.9x above its 5-year average.
Are there winners in the crisis?
Companies with strong balance sheets, high profitability, strong market positions and robust business models that are benefiting from the crisis (eCommerce, software, food retailing, vaccines) and that have not had to cut their dividends or profit expectations have clearly outperformed the market and are in the black this year. These include the usual suspects such as Amazon, Netflix, Zoom, Nvidia, AMD, Johnson & Johnson, Microsoft, Roche, Nestle, Novo Nordisk and retailers like Ahold. US technology groups in particular are benefiting from the crisis-related acceleration in the digitalization of business models and consumer behavior.
What insights do the annual reports provide in Q1?
In many cases, companies have abandoned their annual forecasts for 2020, cut dividends, cancelled share buyback programs and accepted or applied for government-sponsored aid programs to protect liquidity and the workforce. Companies report a recovery in China since April and major slumps in Europe and the US from March onwards. Companies with strong brands and mature eCommerce strategies, such as L'Oreal and Nike, are benefiting from online consumption and are able to further increase customer loyalty, thus cushioning the slump in retail. What is completely new is the focus of many companies on the social component of ESG criteria for sustainability in the form of job security and protection for employees, better payment conditions and security for customers and suppliers and the production of COVID vaccines, medical protective clothing, fans, disinfectants, etc. without financial KPIs.