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Vaccine developments and stimulus overshadow earnings


Positive key vaccine data and a €750 billion EU recovery fund deal kicked start the week, moving equity markets higher and shifting headlines away from the second quarter earnings season.

AstraZeneca, one of the largest pharmaceutical company in Europe, reported positive vaccine developments in the ongoing vaccine trials led by Oxford University, which is currently leading the vaccine race. The results published yesterday indicate that the vaccine was tolerated and generated robust immune responses against the covid-19 virus in all evaluated participants. Pfizer and BioNTech, also announced positive preliminary data from another vaccine study. On top of that, EU leaders managed to reach an agreement over the details of a recovery fund for Europe, securing €750 billion pandemic stimulus, €390 billion of which will be distributed as grants.

Throughout the week, almost 80 companies out of those listed on the S&P 500 index and components of the Eurostoxx 600 index, which track the performance of the largest listed equities in US and Europe, are expected to report their second quarter results. Amidst the clouded macro backdrop and minimal management guidance on expected earnings, this earnings season is expected to cast a light on the real impact of the covid-19 pandemic.

On average, market consensus expects earnings for Eurostoxx 600 index companies to decline by more than half, compared to second quarter earnings of 2019. Similarly, earnings expectations for the US equity market index are expected to decline by 44% year-on-year, during the second quarter. According to Factset, this is the largest expected yearly earnings decline since 2008. In aggregate, analysts expect earnings only to return to growth in the first quarter of 2021.

So far, the majority of companies that have reported second quarter earnings are in the financial sector. The largest US banks, including JP Morgan and Bank of America, started off the earnings season with a positive revenue surprise, having managed to beat revenue expectations for the second quarter on the back of stronger trading revenues. The higher market volatility and increase in issuance across capital markets boosted the banks’ investment arm. This helped to offset the decline in revenues across the consumer business lines. Even so, earnings were negatively impacted by the additional amount of provisions set aside amidst rising concerns on economic expectations and the consequent expected increase in nonperforming loans.

Almost one fourth of the companies reporting second quarter earnings results this week are in the industrials sector, which were amongst the hardest hit throughout the pandemic. There will also be a concentration of results in the financial sector and earnings across information technology firms. Microsoft, which is among the technology companies expected to issue its quarterly update this week, is among the equity winners during the pandemic, with its share price currently sitting on a 12% gain from the start of the year. The technology giant has benefitted from the accelerated adoption of digitalisation brought about by the covid-19 pandemic is well-positioned to continue to benefit from the secular trend of cloud adoption.

Despite the weaker outlook, the equity market indices have managed to record double digit returns over the past three months, as investors shift their focus to earnings outlook beyond the gloomy 2020 outlook, and the unprecedented level of stimulus by governments and monetary authorities. On this basis, management commentary throughout this earnings season is expected to gain more attention than the backward-looking results for the past three months.


This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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