How Will Earnings Ever Get Back to Positive?

What will it take to get corporate earnings out of the red? Consumers willing to go forth into the public melee and spend. And that might be a tall order.

Analysts have written off 2020 as a losing year, noted Brad McMillan, CIO of Commonwealth Financial Network. Indeed, analysts see negative numbers for all of this year, according to FactSet Research, which predicts losses of 14.5%% in the first quarter, 26.6% in the second, 13.3% in the third, and 4.8% in the fourth.

At present, McMillan pointed out, the expectation is for resumed earnings growth in 2021’s first period. Getting there, he wrote in a research report, will be no slam dunk, though.

“For that to happen, the virus will need to have been brought under control,” he said, “and the US and global economy will need to have opened up again.”

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But the crucial factor, he went on, is that “American consumers (more than any other) will need to be comfortable going out and spending money like they did in 2019.” And that, he added ominously, “is the weakest link.”

Despite noisy demonstrations in some state capitals among folks who want to re-open US businesses very soon, a recent Gallup Poll found that a huge majority of Americans wish to “wait and see what happens with the spread of the virus (71%)” and 10% contended that would wait “indefinitely.” A mere 20% say they would return to their normal activities “immediately.”

McMillan figured that re-opening the economy and controlling the coronavirus were reasonable to anticipate. Yet the third condition for positive earnings, “consumer willingness to go spend, is the big wild card.”

For sure, moving from a world where everyone wears masks and keeps six feet away from others is not easy to transition from, back to crowded malls, eateries, workplaces, and sports arenas. “Just ask yourself this,” he said, “in six to 12 months, will you be over this?

Leuthold Group thinks earnings will take up to four years to revisit their 2019 peak. There’s a long road in between.