Walgreens reported earnings yesterday with EPS missing estimates by 30% and FY20 outlook that was 13% below estimates on top of 4,000 job cuts in the UK and suspension of its share buyback programme. Investors were not pleased with the outlook and the shares were down 8%. With 80% of the companies in the S&P 500 pulling their guidance in Q1 investors have basically been flying blindly into the storm and mains questions are whether companies will provide guidance again and if not, how investors will react? If Walgreens earnings result is weak guidance, then the Q2 earnings season will shape up to be dramatic confirming why the VIX Index remains elevated around the 30 level.

Walgreens’ fiscal year is not following the calendar year, so their earnings release yesterday is typically not considered part of the Q2 season but with two fiscal months overlapping the Q2 calendar quarter it is indeed part of this earnings season. But next week is the real start to the Q2 earnings season with 34 companies in the S&P 500 reporting earnings (see list below). We would highlight three things to watch next week: 1) financials, 2) Delta Air Lines, and 3) Netflix. Financials are dominating the week and the focus will obviously be on loan losses which rose dramatically in Q1 and is the key reason why the Fed is recommending banks to hold back on dividends to build up their buffers against loan losses. Delta Air Lines will be the first airliner to report numbers for Q2 and it will be interesting to see whether management dares provide a guidance for FY20. Netflix is part of the group of online/technology stocks that has been pushed higher this year as investors have shifted portfolio exposure towards growth stocks. Netflix is coming into the earnings season with very high expectations for revenue growth (estimates are looking for 23% y/y growth in revenue) and investors are increasingly demanding a visible path to being cash flow positive. 

Looking further into the future the list below shows the 30 largest stocks in the S&P 500 Index. These are the key names to watch as they represent 44% of the S&P 500. Already by 31 July, after three weeks of earnings, we will know the shape and hopefully a trajectory of US corporate earnings. Technology earnings hold the key to overall market sentiment and levels in US equities so names such as Amazon, Alphabet, Microsoft, Facebook, Apple and Nvidia must deliver for equities to remain at current levels. Our advice to investors is to be cautious going into the Q2 earnings season and avoiding having full exposure in equities as it could become a volatile summer.

In terms of sectors the chart illustrates expectations across sectors ahead of earnings. Analysts have remained relatively bullish on utilities, information technology, health care, consumer staples and telecommunication services. In other words, expectations are the highest here and thus represent the biggest downside risk to the market if these expectations are not met. It also worth noting that expectations for earnings in the real estate sector are continuing down which is a bad signal for banks and eventually overall credit flow as worsening collateral on real estate could force banks to tighten credit standards even more. Also note that the energy sector is missing but that is because earnings expectations are down 72% from 23 March and would destroy readability of the chart. The two sectors with the worst expectations are consumer discretionary and energy where analysts are expecting negative aggregate earnings as the lockdowns have hit these two sectors the hardest in Q2.