48 Business The EconomistAugust 8th 2020
21chronised cyclical recovery from the co-
vid-19 crash has started”, with manufactur-
ing leading the way. “Recovery is happen-
ing,” echoes Michael Wilson of Morgan
Stanley, pointing to promising advances in
treatments and vaccines for covid-19.
Hang on a minute. The green shoots of-
fer hope and earnings may have beaten ex-
pectations. But, as David Kostin of Gold-
man Sachs, another bank, notes, the bar
was very low. By his reckoning, in a typical
quarter about 5% of firms produce earn-
ings per share above forecasts. That this
quarter’s figure may be closer to 25% is
merely “kabuki theatre” of expectation
management, he says. If the bottom fell out
of the economy in the second quarter, as of-
ficial statistics imply, then the private sec-
tor must be dragging it down.
Quarterly sales fell by an average of 10%,
year on year, at s&p500 companies which
reported by the end of July. Some indus-
tries suffered a bigger hit. Revenues
plunged by half at energy firms, a third for
producers of durable goods and other non-staples, and by nearly as much at industrial
firms (see chart 1 on previous page). Over-
all, earnings per share contracted faster at
American firms, by a third year on year,
than those at historically less profitable
European ones, whose profits fell by less
than a quarter.
The crunch is worse at smaller firms. Mr
Kostin calculates that, as of August 3rd,
quarterly earnings for s&p500 companies
were down by about 35% year on year. For
those in the Russell 2000 index of smaller
firms, they had nearly evaporated entirely.
The collective headline numbers for big
companies are also flattered by the success
of America’s technology giants (see chart
2). Facebook, Apple, Microsoft, Amazon
and Alphabet are thriving, by making life
possible for remote workers, online shop-
pers and anyone who seeks solace online.
The quintet, which together represent 22%
of the s&p500’s market value, up from 16%
a year ago, has generated stockmarket re-
turns of 35% so far this year, against -5% for
the other 495 firms in the index.
This dominance has boosted the mar-
ket—and investor confidence. But it poses
a risk for the unwary. Mr Golub says that
unlike the flaky internet firms that col-
lapsed when the dotcom bubble burst two
decades ago, the five tech titans have solid
business models, little debt and strong rev-
enue growth. But should a speedy recovery
materialise, money could flow out of tech
and into currently unloved sectors such as
heavy industry.
Another underappreciated threat to
share prices comes from government. To-
bias Levkovich of Citigroup, a bank, points
out that the “womb to tomb” safety net in
Europe provides more generous and lon-
ger-lived relief in a downturn than Ameri-
ca’s more threadbare benefits. Congress
seems poised to reduce stimulus spending
that has supported firms keeping fur-
loughed workers on their payrolls and paid
unusually plush unemployment benefits,
which recipients could spend not just on
rent and bills but also on other, less vital
things. Mr Levkovich calculates that tax-payers financed between $50bn and $75bn
of firms’ labour costs associated with fur-
loughed workers. If such support is with-
drawn in the second half of the year, he
warns, “we must worry that the upside
earnings surprises are not repeatable.”
For the time being the market thinks
they are. ceos themselves are partly re-
sponsible for this, by tirelessly spinning
investors a positive yarn. s&p500 firms
which forecast higher future earnings now
outnumber those offering lower or no
guidance by two to one (see chart 3). In the
previous quarter the coy and pessimistic
were 15 times as numerous as the sunny.
Yet when the Conference Board, a re-
search group, recently surveyed hundreds
of American bosses anonymously, it en-
countered much more pessimism about
the timing and robustness of economic re-
covery than among ceos in Europe and
Asia. Whereas 40% of chief executives in
China see sales returning to pre-pandemic
levels by the end of 2020, only 12% of Amer-
ican bosses do. The Conference Board con-
cludes that a return to pre-coronavirus rev-
enues is “at least a year or more down the
road” and that “risk and volatility will re-
main high for the foreseeable future.”
Sooner or later investors seduced byceos’
public sweet talk—and by tina—will come
to their senses. Won’t they? 7The bigger, the betterSources:MorganStanley;DatastreamfromRefinitiv2100806040202019 2020Dec Jan Feb Mar Apr May JunS&P stockmarket indices, December2019=100
12-month forward earnings by marketcapitalisationLargeMidSmall14012010080602020Jan Feb Mar Apr May JulJun AugShare prices
January1st2020=100S&P 500
(excl. FAMAA)S&P 500FAMAA (Facebook, Apple,
Microsoft, Amazon & Alphabet)SentimentanalysisSources: JPMorgan Chase; The Conference Board *At July 31st380
60
40
20
0
2018 19 20 *S&P 500 , %ofcompanieschangingearningsguidance
Higher Lower/withdrawn200 40 60 80 100United States, senior executives’ expectations
of restoring revenues to pre-pandemic levels
June2020,%ofexecutivessurveyed
Nodecline/alreadyrestored
During 20 21 After 2021Before end of 2020L
ast monthTesla reported second-quar-
ter net income of $104m. This came as a
surprise; the pandemic has pushed many
carmakers into the red as cash-strapped
consumers put off purchases. It also had
Tesla’s investors aflutter, for it marked the
firm’s fourth consecutive quarter of pro-
fits. At last, thanks to that milestone, the
maker of snazzy electric vehicles—which
in July overtook Toyota was the world’s
most valuable car firm—met the formal cri-
teria for inclusion in the s&p500.
As covid-19 has boosted pandemic-re-
silient businesses such as technology
firms while walloping industries such as
travel, more companies than usual may
drop out of or enter that coveted club this
year. Membership of Wall Street’s flagship
share index is seen as a boon, because “pas-
sive” investors, who do not actively pick
winning stocks but merely track the broad-
er stockmarket, must buy the shares of any
new member (and sell those of the firm it
displaces). This should drive up the en-Joining the s&p500 may not be as big a
boon as traditionally assumedStockmarket indicesInclusive growth