Analysts Are Fooling Themselves About Earnings. Here’s Why…
I’m sure many of you have experienced children waking up to a nightmare. Things are bad for those very first few minutes, often accompanied by frightened tears. You calm them, assuring them it’s all over and everything is fine. If all goes well, within minutes they’ve drifted back to sleep, and everyone forgets about it all by the next morning.
Analysts seem to believe they’ll be able to treat the world’s response to the pandemic like that child waking up from a nightmare. The economic impact is going to be bad for a few minutes, but then it will all calm down, and normal life can resume by the morning. The economic turmoil will be nothing but a bad dream quickly fading into the ether.
All of this is beautifully illustrated in the chart below, which shows expected earnings per share (EPS) for the companies in the S&P 500.
You can see the nightmare — it’s the 17.9% drop in earnings expectations for the year. But it’s okay, everything will be fine, the analysts tell us. Next year, EPS will reach a new all-time high, and the uptrend can resume.
If you haven’t guessed by now, this all strikes me as incredibly optimistic.
It’s Going To Get Ugly For Small Business
You’ve probably seen news reports citing the outlook for restaurants… stories with headlines like, “Restaurant CEO on COVID-19: ‘I honestly don’t see a scenario where 50% to 60% of restaurants don’t close.'”
I’ve seen other industry experts citing similar numbers. And those concerns apply to other small businesses as well.
My worry is that reopening the economy won’t be as simple as closing it was. Many businesses won’t be profitable at 50% capacity, which is all that is currently possible for many businesses, given social distancing requirements, not to mention consumer fear.
In fact, I predict reopening will be challenging. I think we’ll see a brief period of growth after the initial relaxation of restrictions, but it’s very likely some businesses will still fail. These businesses will be unable to make a profit in the “new normal” environment, which includes higher operating costs and lower customer demand. After a second period of economic turbulence, we’ll see the second recovery, and that will eventually set us up on firm ground that’s ready to support new highs.
But for now, businesses are still trapped in the nightmare. This too will pass, and everything will be fine again. Not tomorrow, but someday.
How I’m Trading This Market
Until then, we’ll continue to see economic stress. With this forecast, I am recommending another trade in the iShares 20+ Year Treasury Bond ETF (Nasdaq: TLT).
This ETF tracks long-term Treasury bonds. The price of TLT will fall when interest rates rise, and that is unlikely to happen for months.
The chart below shows the interest rate on 10-year Treasury notes, which has been stuck near 0.6%.
There may be volatility in rates (and therefore, in TLT), but rates will remain low until the Federal Reserve decides they should be higher. That day will come, eventually. But the Fed will not consider raising rates until there are signs of economic growth, and I don’t see that happening until later this year, at the earliest.
As you may recall, we have now made several profitable trades in TLT over at my premium Income Trader service. And I expect the same this time around as well.
And while I can’t reveal the exact details of this trade out of fairness to my subscribers, what I can say is that if you are familiar with how put options work, then this is a conservative income trade you should consider.
In the meantime, if things continue as they have, I expect we will see additional opportunities develop. So if you’d like to learn more about our service – and how we’re racking up winning trades in this challenging market – go here now.