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Stocks face headwinds as investors look forward to a big earnings week, a Fed meeting and state reopenings

A masked pedestrian carrying water bottles walks past the Charging Bull statue in lower Manhattan on April 02, 2020 in New York City.

Bruce Bennett | Getty Images

The stock market is struggling to make headway, as a big week of events rolls around, including a Federal Reserve meeting, the first look at post-shutdown economic growth and earnings from more than a fifth of the S&P 500 companies.

It’s a busy week for earnings, and some of the biggest blue chips are likely to join the growing list of companies withdrawing guidance amid the uncertainty of how the  coronavirus and shutdowns are impacting their business. Apple, Microsoft, Amazon, Facebook, Boeing and McDonald’s are among about 140 S&P 500 companies reporting first quarter results.

Investors will also be watching the progress of the reopening of business activity in some states, like Georgia, Texas, Oklahoma and South Carolina. At the same time, President Donald Trump said he may extend social distancing guidelines into early summer. Many states, including the hardest hit, remain completely shut down.

Stocks were higher Friday, but the major indices had their first negative week in three as oil prices cratered and then steadied in the mid-teens. The S&P 500 has been trading on both sides of the key 2,800 level, as investors focused on murky corporate outlooks and uncertainty surrounding the timing of the reopening of the economy. Even though several states are resuming some activities, Trump said he disagreed with Georgia’s plan to reopen.

On Friday, the S&P closed at 2,836, down 1.3% for the week.  

Earnings for the first quarter have been bleak so far, down about 14% based on estimates and actual reports, according to Refinitiv. Second quarter results are expected to be far worse, declining 32.2%.

“If you take a look where the real battle is in the market, it’s a fundamental story,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. “The fundamentals are that the market should be lower, and on the other hand, the Fed is kind of putting their thumb on the scale in favor of the market.”

Golub said it’s the potential for recurrences of the outbreak that’s being watched to see if businesses can remain open once they start back up. “People are watching what’s going on in places like Georgia, but they’re also watching what’s going on in Singapore and places in Asia that are opening up,” he said. “At the end of the day, there’s really one thing that really matters. It’s not the Fed. The virus is going to own the agenda, whether we want it to or not.”

Fed bazooka

The Fed meets Tuesday and Wednesday, and while it’s not expected to take any new action, it will likely discuss the many programs it quickly rolled out to support the economy and provide liquidity.

“I’m anticipating no actions in terms of anything with purchases or interest rate movements,” said Luke Tilley, chief economist at Wilmington Trust. “I think we’re going to hear a lot more in terms of their description of what’s working and the things that still need to happen.”

Tilley said the Fed’s job is also to instill confidence, and its asset purchase and other programs to support mortgages, corporate credit and municipal bonds, helped bring back in spreads that had been widening out across the credit markets. “It looked like we were headed for a seizure in credit markets, but they’ve come back in,” he said, adding he expects the Fed to also discuss programs like its support for the small business lending program.

Fed Chairman Jerome Powell is also expected to sound optimistic about the central bank’s ability to help the economy, despite the uncertainty as the economy falls into an unprecedented decline in the second quarter. Tilley said he expects the economy to contract in the second quarter by 40%. 

Golub said this Fed meeting isn’t as important as others have been, since the central bank has already taken so many extraordinary policy steps and promises to do more as needed. 

“The Fed has made it clear if they need to provide liquidity to the market, they’re not going to wait for a meeting to do it,” he said. “Whether you’re borrowing from a bank or whether you’re borrowing in the capital markets, that capital is available so the economy can move … the net effect is it also pushes the stock market up.” 

Economic impact

First quarter gross domestic product numbers are expected Wednesday, and it will be the first look at how the early weeks of the shutdown impacted the broader economy. Forecasts are wide ranging, and the consensus forecast from Refinitiv is now for a contraction of 4.1%. Economists expect the second quarter to take the biggest hit of the recession, and it is forecast by many to show a contraction of more than 30%.

Some of the early second-quarter data will be released in the coming week. Vehicle sales slowed to a trickle in April, and auto makers shut down production.

The impact of that should show up in Friday’s April vehicle sales and ISM manufacturing, but the single-most important data point will be Thursday’s weekly jobless claims, expected again to show millions of workers signed up for unemployment benefits.

So far, 26.5 million unemployment claims have been filed in the last five weeks, wiping out all the job gains made since the end of the Great Recession. The employment report for April will be released on May 8, and economists say unemployment will likely peak in April or May before falling off.

“We’ll probably see an unemployment rate at 20% or a little higher,”  Tilley said.

Earnings 

Earnings reports are expected from a range of industries, such as tech, health care, energy and defense. Merck, Pfizer, AstraZeneca, Humana and Anthem are among health care names reporting. Big oil companies, Exxon Mobil and Chevron both release results on Friday, and their comments on how they are reacting to the shocking decline in crude oil prices this past week will be important.

An oil futures contract for May dove into negative territory Monday and Tuesday, as did prices in many spot markets. That contract expired Tuesday, and the June futures contract for West Texas Intermediate settled at $16.94 per barrel Friday, down about 7.3% for the week and about $5 lower than the price of Brent futures.

“The most important earnings story is not what happens this quarter, it’s how long does it take to get back to peak earnings again,” said Golub. “My estimate is this is going to take three years to get back to peak profits. But the estimates right now are reflecting that it’s going to turn back to normal by something closer to the third quarter of next year. I think that’s too optimistic.The second part of the earnings story is how fast estimates are coming down.”

He said first quarter earnings per share look to be down a little more than 12%, though some estimates have them down 16% or 17%. “We had 10 very healthy weeks and three not healthy weeks. The fact you could have such a negative quarter with only three bad week, that’s really bad.” Golub said. His forecast is for a 40% decline in second quarter profits.

Week ahead calendar

Monday

Earnings: Check Point Software, Bayer, Adidas, Celanese, Canadian National Railway, Keurig Dr. Pepper, National Oilwell Varco, NXP Semiconductor, PPG Industries

Tuesday

Earnings: Alphabet, Starbucks,  Caterpillar, Merck, Pfizer, UPS, D.R.Horton, Pepsico, Sirius XM, T. Rowe Price, Corning, Southwest Air, UBS, Cummins, MSCI, Vale, Rockwell Automation, T. Rowe Price, Juniper Semiconductor, Akamai, Boyd Gaming, Cerner, FireEye, Oneok, Advanced Micro Devices, Mondelez

Fed begins two-day meeting

8:30 a.m. Advanced economic indicators

9:00 a.m S&P/Case-Shiller home prices

10:00 a.m. Consumer confidence

Wednesday

 Earnings: Boeing, Microsoft, Airbus, Facebook, Tesla, Qualcomm, Anthem, AstraZeneca, Boston Scientific, GlaxoSmithKline, General Dynamics, Mastercard, Norfolk Southern, Humana, Northrop Grumman, Sherwin-Williams, Valero, eBay, Aflac, Raymond James, General Electric, Avery Dennison,  Transocean

8:30 a.m. First-quarter GDP

10:00 a.m. Pending home sales

2 p.m. Fed statement

2:30 p.m. Fed Chairman Jerome Powell briefing

Thursday

Earnings: Amazon.com, Apple, Comcast, Gilead Sciences, Twitter, McDonald’s, MGM Resorts, Beazer Homes, BioMarn Pharma, Cabot Oil and Gas, Molina Healthcare, Stryker, Whirlpool, Parker Hannifin, Marsh and McLennan, Nokia, Royal Dutch Shell, Stanley Black and Decker, Six Flags, Moody’s, Dunkin Brands, Carlyle Group,  Cigna, ConocoPhillips, Kraft Heinz, Kellogg, Molson Coors Brewing, Public Storage

8:30 a.m. Initial claims

8:30 a.m. Personal income/spending

8:30 a.m. Employment cost index

8:45 a.m. Chicago PMI

Friday

Earnings: Exxon Mobil, Chevron, Colgate-Palmolive, Clorox, Estee Lauder, Johnson Controls, Phillips 66, Newell Brands, Weyerhaueser, Apollo Global Management, Honeywell, Newell Brands

Monthly vehicle sales

9:45 a.m. Manufacturing PMI

10:00 a.m. ISM manufacturing

10:00 a.m. Construction spending