Yahoo Finance Analyst: Get ready for US companies to blame Brexit for the next 8 to 10 quarters
Sick of hearing about Brexit? Well, you haven’t heard anything yet, according to Wells Fargo’s Scott Wren.
“When the future is rife with uncertainty and everyone from the Federal Reserve to corporate CEOs is biting their fingernails due to a bad case of anxiety, the search for a scapegoat shifts into overdrive,” Wren wrote in a note to clients.
He added that the idea that the Fed and companies have an accurate and clear view of the future is false.
“In anything but the most optimal economic environments, the Fed and corporate projections will often be erroneous. This has been especially true in the current cycle,” he wrote.
This time the scapegoat will be Brexit, or the UK electorate’s decision to exit the European Union.
Many corporate executives have joined politicians in their predictions of global uncertainty and decreased trade in an already slow economy. But Wren notes that multiple surveys taken after the vote have shown that the vast majority of US companies expect minimal impact to their business and profitability.
“Don’t expect this optimistic attitude to show itself over the course of the next four or five weeks as earnings results for the second quarter are reported and forecasts are conveyed,” wrote Wren, who is calling for adjusted earnings to be down 4% year-over-year. “Be ready to be hit over the head constantly with references to the UK referendum during this earnings reporting season. Many companies will express a guarded outlook and some might even try to tell investors that uncertainty going into the vote contributed negatively to performance in the second quarter.”
This could last even more than one quarter, he said. “It is likely that over the next eight to 10 (or even more) quarters companies will be going back again and again to using Brexit as an excuse for underperformance. The scapegoat isn’t going away anytime soon.”
JP Morgan (JPM) Chairman and CEO Jamie Dimon noted the impact, though said the direct impact on his business remains unclear.
“We do think it will reduce the GDP the UK and the EU a little bit,” Dimon said on the company’s second quarter conference call Thursday. “We know it will create uncertainty for an extended time period…Time to adjust to the new reality which we don’t know what it is.”
Delta (DAL) issued a weaker-than-expected outlook on Thursday, projecting that unit revenue would fall 4-6% in the third quarter. The company also said in its second quarter earnings report Thursday that available seats will only increase 1% year-over-year in the fourth quarter, half of what was previously planned. This is a step toward limiting the decline in passenger revenue per seat mile, or unit revenue, which has plagued the airline group this year.
Management added that the carrier is planning more extensive capacity reductions on routes to the UK because of the drop in the pound and economic uncertainty after Brexit.
Delta CEO Edward Bastion said on the company’s conference call Thursday that foreign exchange changes will impact results.
“Now with the foreign currency pressure from the steep drop in the pound, the economic uncertainty from Brexit and continuing yield pressures in the North Atlantic we decided to take an additional 6 points of capacity out of the UK for the winter season. Combined overall UK capacity this winter will be down 2 to 4% compared to the prior year. For Delta these changes along with other network actions will take roughly one point of capacity out of the system and we now expect our fourth quarter capacity to grow by only 1% year over year.”
Just a couple of weeks ago, Carnival (CCL) also blamed Brexit in its guidance.
With earnings season just getting started, expect to hear a lot more about uncertainty, currency, and the EU.
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