Volatility Eases in U.S. Stock Futures, Bouncing After Down Week

(Bloomberg) — At the outset of a month promising extreme earnings volatility, American equity futures advanced after President Donald Trump and Vice President Mike Pence said they see signs the U.S. coronavirus outbreak is beginning to level off or stabilize.

Contracts on the S&P 500 rose 4.1% at 6:53 a.m. in London, while futures climbed 4.2% on the Nasdaq 100 Index and added 4% on the Dow Jones Industrial Average. The daily toll in some of the world’s outbreak epicenters was lower Sunday. New York State fatalities fell for the first time. Italy had the fewest deaths in more than two weeks. France reported the lowest number in five days. Spain’s tally fell for three days in a row.

Meanwhile, investors are assessing the outlook for a reporting season that while still a week away is being eyed urgently by Wall Street for clues on corporate value. Six weeks of coronavirus lockdowns, a plunge in oil and an evaporation of consumer demand globally have thrown analyst estimates into chaos and left traders bracing for extreme swings.

Volatility has gripped financial markets for six weeks as the response to the virus shutters large regions of the global economy. Futures have reached limits that restrict losses or gains. Contracts on the S&P 500 won’t be allowed to appreciate past 2,601.50 or to fall below 2,353.50, 5% from a reference price calculated in the final 30 seconds of trading Friday. The S&P 500 lost 2.1% last week as a rebound rally faded out.

“We are going to see more volatility and we’re going to see it until we have a clear vision on what’s going to happen with the coronavirus,” said Peter Mallouk, president of Creative Planning, which manages about $45 billion. “Everyone keeps trying to talk about this economic data as if we can look at it the way we look at it normally. Really, you can’t look at it that way.”

Despite a rout that at once lopped a third of the value from major benchmarks, measures of sentiment still show investors clinging to a profit outcome that would be less severe than in the worst recessions. Using Friday’s close and applying its average valuation over the last 50 years of 16.8 times, the S&P 500 is pricing in 2020 profits of about $148 a share, roughly 9% below the level of the previous year, data compiled by Bloomberg show.

Complicating the calculus is the extreme dispersion of estimates for individual stocks, nearly the widest ever. Wall Street has almost never disagreed this much about what companies will earn, with many forecasts going stale as researchers refused to hazard guesses. As of now, the consensus prediction calls for operating income to fall 8.3% in the first quarter, 16% in the second and 4.9% in the third, before rebounding in the fourth. For the full year, analysts see a 5.9% drop in earnings followed by a 16% rebound in 2021.

Late Friday, Delta Air Lines projected that second-quarter revenue will fall 90% amid a daily cash burn rate of $60 million. Analysts had been predicting a 52% drop in sales.

Data like that explain why measures of share turbulence remain elevated. The Cboe Volatility Index closed Friday at 46.8, a level that prior to last month would’ve been the highest in nine years. Options-derived measures of expected swings for individual stocks on earnings-announcement days are nearly double the usual level for the coming reporting season.

On Friday, the S&P 500 fell for the third time in four days as investors digested an abysmal jobs report that captured data in the period largely before government-mandated shutdowns went into widespread effect. As with record claims for unemployment, the latest numbers bear little information on the current state of the economy, making it difficult for investors to value financial assets.

On the other hand, stocks continue largely to hold a rally that propelled it 18% higher over three days after hitting the bear market’s lowest point on March 23. That came after the fastest 30% plunge on record as the pandemic forced the economy into a virtual standstill.

Smaller stocks continue to bear the brunt of the pain. Down 3.1% Friday, the Russell 2000 Index ended the five days with a 7.1% decline, leaving it almost 40% below its high in January. That compares with a 2.1% weekly loss in the S&P 500, leaving it down almost 27% from its record. This week’s divergence is the widest since March 13 when it had the biggest gap in two decades.

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