Halfway through earnings season, the coronavirus resurgence is overshadowing great results

It’s simple: Wall Street doesn’t live on past earnings reports, however good they may be. It lives on future earnings projections, and they are now in danger of going south.

Wall Street is being hit with a quadruple whammy: 1) the reopening narrative is in trouble, 2) stocks are richly priced even for an economic recovery, 3) strong earnings reports are not moving stocks up, and 4) CEOs are again for the most part declining to provide guidance, leaving analysts to themselves.

Wall Street was betting the reopening continuing to proceed without lockdowns and additional stimulus will be coming that is the bridge to a vaccine that will be widely available some time in the second quarter.

Then Europe happened. Germany and France closing bars and restaurants for at least a month.

Lockdowns? We were supposed to be learning to live with Covid.

“Lockdowns were off the table, but now we are dealing with lockdown light,” Alec Young from Tactical Alpha told me, noting that even if outright lockdowns do not happen in the U.S., a widespread slowdown in economic activity — with many simply refusing to go out regardless of whether stores and restaurants are open or not — is increasingly likely.

Third quarter numbers have been great, but Wall Street has been betting that the following three quarters (Q4, Q1, and Q2) will also see sequential improvement as the reopening story proceeds:

S&P 500 Earnings: high expectations (estimates, YOY)

2020

2021

Source: Refinitiv

The “lockdown light” story kills a lot of this.

“The improvement in earnings is underway. Any prolonged shutdowns will put an end to that improvement,” Nick Raich from Earnings Scout told me.