The sharper the contraction in earnings, the faster the recovery: J.P. Morgan Private Bank's Global Head of Equities

Global Head of Equities at J.P. Morgan Private Bank Cayman Wills joins The Final Round to highlight the key themes that she is expecting to emerge in markets for the second half of 2020.

Video Transcript

- Let's talk a little bit more about everything going on in this market and especially things we need to watch out for as we get towards earnings season. We're joined now by Cayman Wills, the global head of equities at JP Morgan Private Bank. And so, Cayman, we've seen some preliminary results from the banks that always go first. But the next couple of weeks, we're going to get into the real teeth of earnings season here. And I guess as you guys look at it, what are you looking out for?

And then, also, we've heard from a number of strategist analysts who say, we're not focused on the second quarter. We're actually looking at 2021 earnings. How do you navigate that-- that kind of environment?

CAYMAN WILLS: Sure. So I'll start with the first part where going into this earnings season my team and I identified four themes that we thought would play out. The first was we're going in with really low expectations. So it's going to be hard to disappoint. I think investors have already braced for what will likely be the worst quarter since 2008. And you've got consensus calling for down 40 to down 45%. So how were thinking about Q2 is really that this will likely be peak pain in the 2020 calendar earnings season.

The next theme we think will play out is this divergence that we're already seeing in the price action with sectors, that although sectors, all sectors, all Levin S&P sectors will likely be down-- no one is immune from this crisis-- you will likely see this divergence. Meaning, pockets like energy, consumer discretionary financials, probably the hardest hit. And then on the other side, technology which, again, is still likely down but more to the tune of single digits. So again, just reaffirming what the market has already told us about winners and losers in terms of sector allocation.

The third thing was around anything we can get from management teams around guidance. As a reminder, in the first quarter about 180 companies pulled their guidance. And that trend may continue into this quarter. But any nuggets of information we can get from them in terms of the reopening, changes to supply chains, ongoing operations, their future dividend strength will be really important. And then finally, earnings will likely rebound. But it's going to take some time. And this kind of gets the second part of your question.

Where we've seen the economic data begin to inflect, we've certainly seen a V-shaped recovery in the markets. But earnings are going to take some time. So, again, Q2 is at peak pain. Likely some incremental improvement in the third quarter. But really we view that real rebound in earnings in 2021.

- And so then I mean, let's go back maybe pulling away from earnings season and just thinking about the setup here and the questions I'm sure you're getting. And we've asked pretty much everybody this, which is, what's your stock answer when clients say, hey, why is the market up so much versus what we know is happening in the real economy? And especially as you outline this environment where earnings are not just going to be challenged in the second quarter, but I think certainly challenged for a couple of quarters here even if there is a recovery of some sort.

CAYMAN WILLS: Yes. There's certainly a lot of known unknowns out there. But what you've got to remember is that the markets are going to move ahead of the green flag go ahead signal. And really what they're looking at is the sharper the contraction in earnings, the faster the recovery. Similar when you look at GDP forecast and estimates. And so that's where we're anchored on where we do believe that this recovery will occur. But it's really in the 2021 framework.

And so more and more as we get to the back end of the year, we believe the market's going to be trading off of those 2021 estimates, not these 2020 numbers.

- And then in terms of areas that you like, you highlight tech. And I would just ask, if you are concerned with liking tech considering everyone else seems to like tech, and-- and what are the drivers there of that thesis? There's always-- on the one hand, there's comfort, right? This is the most popular trade. On the other hand, there's risk. Because I think we all can articulate the basic outline for tech. But if everyone knows it, you know, what's the opportunity for investors?

CAYMAN WILLS: And, Miles, you've hit the-- you've hit it on the head. We had that exact discussion this morning where technology has certainly run up 18% year-to-date versus a flat market. So when we are talking about tech, we're talking about being more selective going forward. And where we're focused is in the semiconductors. This is a pocket that tends to be more cyclically exposed and touches so many important end markets, whether it's autos, data centers, 5G, AI.

Plus this is an area where we continue to see positive earnings revisions. And the consolidation we saw earlier in the week may be another tailwind to this space.