Recent turbulence in markets threatens to upend bets on a relatively calm earnings season ahead.
Fears about the coronavirus broke the sleepy stretch in markets, with stocks and crude oil tumbling Monday as the detection of infected patients in the U.S., Australia and France fanned worries about its economic impact. The drop is catching many off guard, especially before a busy week of corporate earnings.
Options prices indicate investors weren’t projecting the big moves in individual stocks that sometimes characterize corporate-earnings season. Instead, stocks in the S&P 500 were expected as of Friday to swing about 3.8% on average in the trading session following their reports. That is the lowest projected move since the third quarter of 2017, according to data compiled by UBS Group AG as of Friday.
And through Friday, the S&P 500 hadn’t moved up or down 1% in a single session since mid-October, one of its longest such streaks since the end of 1969. Over the same period, the index has climbed 11%, notching 28 records along the way. The equity gauge was on track to snap this streak Monday.
The record run paused late last week as fears about the virus percolated through markets. Stocks fell on Friday and the declines continued early Monday, with stock futures falling overnight and major indexes dropping shortly after the opening bell.
On Monday, the S&P 500 fell 1.4%. The Cboe Volatility Index, or VIX, jumped to 18.62 in early trading, on track to close at its highest level in months.
The declines come as a busy week of earnings kicks off. Investors will be parsing results from bellwether companies such as McDonald’s Corp. and Caterpillar Inc. that tend to provide clues on the health of the economy, as well as technology heavyweights like Facebook Inc., Amazon.com Inc. and Apple Inc.
Concerns about the virus also appeared on some earnings calls. Joe Moeller, chief operating officer of Procter & Gamble Co., said on Thursday’s earnings call that he is tracking the recent coronavirus because of its potential implications across China’s borders.
“It can also affect consumer confidence in large parts of the market,” he said. “It can affect travel, which does affect our business, and so it’s one of the many pieces of volatility that’s just important we keep in front of us as we think about the prospects for the future.”
The worries about the virus come after some recent earnings releases have encouraged investors about the health of the domestic economy. Several big U.S. banks recently impressed investors with their earnings, showing that the U.S. consumer continues to spend, a bullish sign for the current economic expansion.
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Intel Corp. posted earnings that beat estimates and gave an upbeat outlook for the year. Its stock surged 8.1% Friday, closing at the highest level since September 2000. It fell 2.7% Monday. American Express Co. ’s latest profit also beat Wall Street’s expectations, and the company sounded an upbeat note for 2020. Its shares rose 2.9% Friday even as the broader market declined, but shares fell 3.7% Monday.
Additionally, companies have a low bar to clear this period. Overall, analysts are expecting profits to slide 1.9% for the fourth quarter from a year earlier, FactSet data show. Growth is expected to resume after that, accelerating to about 10% by the third quarter of 2020.
The low expectations could be good news for investors because they set companies up to beat their targets, potentially giving stocks a lift in coming weeks. Almost three-quarters of those that have reported so far have surprised investors with stronger-than-expected earnings, according to FactSet, with many more results pouring in this week and next. About 67% of companies have beaten revenue expectations. Analysts tend to be fairly conservative with their estimates, making earnings beats common.
“I’m really positive on what we’re likely to see,” said Sarah Henry, a portfolio manager at Logan Capital Management.
Still, the tame expectations could cause investors to be caught off-guard by results that are worse than expected—and spark a slide in stock prices. The volatility in markets on Monday is in contrast to what many were expecting this season.
Although the U.S. consumer has powered the economy for the past decade, many investors are watching for signs that people will slow their pace of spending. Within the S&P 500, options investors are bracing for some of the biggest moves for shares of consumer-discretionary companies, the UBS data show.
“The market is thus not expecting large moves on earnings,” said Stuart Kaiser, head of equity derivatives research at UBS. “The part of the market they’re more concerned about is consumer-facing.”
The sector includes household names such as Harley-Davidson Inc. and Starbucks Corp. —both on tap to report this week—and retail heavyweights like Nordstrom Inc., companies whose fortunes tend to be reliant on the health of the American shopper. Tesla Inc. is also poised to report in the coming week after rallying 71% in the past eight weeks through Friday, testing investors’ affection for highflying technology companies that have outperformed lately.
Although fears about global growth re-emerged last week because of the viral outbreak, such worries had abated in recent months. The International Monetary Fund recently said the global economy is poised for a modest rebound in 2020, fueled by easier monetary policy and a trade truce between the U.S. and China.
As a result, investors and analysts have grown more optimistic about stocks’ recent record run. Some have raised their outlooks for the S&P 500 in 2020 after the broad stock-market gauge started the new year on a strong footing, up 2% through Friday.
Wells Fargo Investment Institute said last week that it expects the S&P 500 to jump to as high as 3520 by year-end, about a 7% increase from its prior 3300 target. It closed Friday at 3295.47.
“We see easing trade tensions, firming global growth expectations and continued central-bank monetary support world-wide as the main positive contributors to stronger sentiment and moderately higher valuations,” the strategists wrote.
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Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
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