U.S. management teams face a daunting challenge this earnings season: Message your results to a nation facing a surge of new coronavirus infections and, for many states, a backslide into lockdown, only weeks after initial glimmers of a recovery emerged. For added difficulty, do it just as federal government stimulus expires.
The initial week of second-quarter reports laid bare the uncertainty facing corporate America, and the tension between cautious optimism and a more dire outlook.
The world's largest asset manager fell in the "cautiously optimistic" camp, CEO Larry Fink said during a conference call July 17. BlackRock Inc., which has about $7.32 trillion in assets under management, hosted the call from its New York City offices as employees began a return to the office in split operations.
"I'm heartened as we begin to return to somewhat normalcy. There will be positive societal changes from this pandemic despite the uncertainty and the suffering it is causing today," Fink said. "More companies will adopt a more permanent remote work [culture] coming out of this crisis, which will have a positive environmental impact as congestion eases in cities and, hopefully, improve quality of life for more people."
At the "Big Four" U.S. banks — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — the tone was different in second-quarter earnings calls compared to three months earlier, as management teams suggested that a second consecutive quarter of heavy loss provisions could be enough to mostly carry them through the recession. This group reported sky-high trading and investment banking revenues in the second quarter, but executives said activity had already slowed sharply in June, and investors should expect a reversion to more typical levels of revenue in these areas if conditions remain stable.
"You should assume it's going to fall [by] half," JPMorgan Chase Chairman and CEO Jamie Dimon said of trading revenues during a July 14 conference call. "We don't assume we [will] have these unbelievable trading results going forward. And hopefully, we'll do better than that, but we simply don't know."
Asked about Dimon's statement during an earnings call the following day, Goldman Sachs Group, Inc. CFO Stephen Scherr evinced an equally unclear outlook.
"I don't think any of us are in a position to make such a declarative judgment about the exact direction of trading revenues," Scherr said, later adding: "The second half will be more characterized by uncertainty than any ability to forecast up or down in the market itself."
Despite the uncertainty, many large companies reported revenue gains in the second quarter. Revenue grew a median 3.9% from the linked quarter and 5.2% year over year among the 14 U.S. companies with a market capitalization of $50 billion or more that reported earnings the week ended July 17.
Outside of Wall Street, some companies experienced a return to more normal operations following the initial upheaval associated with the pandemic.
After medical device maker Abbott Laboratories experienced a hit to its business in the first quarter and into April and May due to the cancellation of elective care, procedure volumes in the U.S. were 90% of pre-pandemic levels at the end of June, President and CEO Robert Ford said during a July 16 earnings call.
Abbott reissued its 2020 guidance after pulling full-year guidance in the first quarter. Revenue for the year is likely to grow in the mid-single-digits, and could be higher if COVID-19 testing and manufacturing capacity ramps up in the second half of 2020, Ford said. The company developed tests for both COVID-19 and virus antibodies, and the CEO said the newly developed business is not likely to go away in the near future even if a vaccine emerges.
"As vaccines become available, we would anticipate continued surveillance testing to monitor and assess for both natural and vaccine-related immune response, which would be followed by a steady-state of ongoing monitoring and tracking of vaccine protection," Ford said. "So, looking across the spectrum, it's clear that the need for testing is large and it isn't going away."
Other companies continued to benefit from altered pandemic-era consumer behavior.
PepsiCo Inc. reported 5% organic revenue growth for its snack business in the second quarter as chips and breakfast sales benefited from more people staying in. But fewer people on the go hurt the company's global beverage business, where organic revenue declined 7% in the quarter. PepsiCo expects third-quarter organic revenue gains as consumers stick with cooking and snacking at home, but currency exchange headwinds and higher operating costs will continue to weigh on the company's performance, executives said during a July 13 conference call.
"This is going to be a roller coaster," CEO Ramon Laguarta said of his expectations for recovery.