I have said many times that the main long term driver of the stock market is profits. But in the shorter term various types of news can move the markets significantly.
Let’s first look at the long term driver of the markets, company profits. For over a month, various companies have been reporting their first quarter earnings. With 454 companies from the S&P 500 having reported earnings (91.9% of market cap), JP Morgan’s current estimate for 1st quarter 2020 earnings is $20.23, with earnings per share growth declining 46.7% from the first quarter of 2019. Keep in mind that the economy grew through the first two months of the quarter! The halt in economic activity in March is the primary cause of the earnings slide, although oil prices, which were down 16% on average during the quarter, also contributed to earnings weakness.
Even though second quarter earnings are likely to be much worse, stocks have been trending up. Yesterday the S&P 500 was up 3.15% on positive news regarding initial human clinical trials of a COVID 19 vaccine and continued reports of parts of the country opening up. Obviously current good news has overshadowed the bad news about company profits.
As businesses open up and people begin to leave their homes, will this thrust the stock market even higher, or will a potential second wave of virus infections sober investors that the economic slowdown may not be so quick to go away and create a second market decline, as typically has occurred in past recessions? Only time will tell in this every so hard to predict recession.