Morning Notes — Credit Spreads and 2021 Estimates

CQ1 earnings season: Next Tuesday kicks off the CQ1 earnings season with the first few days mostly focused on results for large US banks. For the last several years, investors have paid attention to bank Net Interest Margins, loan growth and trading income. However, the attention will now shift to the macro implications of Net Charge Offs (NCOs) and qualitative comments around consumer credit. Expect the entire earnings season to be more about qualitative management commentary, cash flow and balance sheet health than actual earnings. A big earnings miss will be largely ignored if there’s solid cash flow and management comfort around the balance sheet given extended lockdown scenarios. And commentary around business conditions since the sharp deterioration in late March will be especially important.

Valuation: On Monday, we provided a fully-stressed, worst-case 2020 S&P 500 EPS estimate of ~$145 vs the current consensus estimate of ~$153. The good news is that investors begin to apply forward-year estimates around mid-year. And that practice might could start earlier given the unusual circumstances associated with present conditions. The current consensus 2021 SPX EPS estimate is ~$175.