Earnings season is upon us and no one is quite sure what we’re in for. Discord between analysts over earnings-per-share (EPS) estimates have soared, thanks in large part to a swath of companies pulling corporate guidance as economic uncertainty swelled in the face of the Covid-19 crisis. Already weak dividends are likely to suffer—particularly at smaller, more cash-strapped companies—but are also climbing in more than 40% of S&P 500® Index companies. Inflation is also ticking up and grew slightly more than expected in Q2, boosted by soaring energy and food prices. But is an unprecedented federal deficit too high a price to pay? And our government isn’t the only one bracing to deal with massive debt; major lenders stockpiled more than $28 billion last quarter to prepare for an enormous wave of loan defaults. A significant portion of the pandemic’s economic impact has thus far been blunted by the CARES Act and the boost to unemployment benefits, but with the $600 addition set to expire next week and unemployment still near record highs, could the worst still be ahead?
1. Covid-driven uncertainty has companies and analysts alike struggling to predict earnings…
![](https://blog.investbcm.com/hubfs/7.15%20Covid-driven%20uncertainty%20has%20companies%20and%20analysts%20alike%20struggling%20to%20predict%20earnings...-1.png)
Source: WSJ Daily Shot, from 7/14/20
2. We note that dividends have been falling since the early 1980’s just like interest rates. Will Covid-19 reverse this trend?
![](https://blog.investbcm.com/hubfs/7.15%20We%20note%20that%20dividends%20have%20been%20falling%20since%20the%20early%201980s%20just%20like%20interest%20rates-1.png)
Source: WSJ Daily Shot, from 7/15/20
3. Smaller companies, needing to preserve cash to deal with the pandemic, have seen many more dividend suspensions and cuts…
![](https://blog.investbcm.com/hubfs/7.15%20Smaller%20companies,%20needing%20to%20preserve%20cash%20to%20deal%20with%20the%20pandemic-1.png)
Source: WSJ Daily Shot, from 7/15/20
4. Energy prices soared in Q2 after plunging ~80% in Q1, which—together with rising food prices—has led to a recovery in inflation.
![](https://blog.investbcm.com/hubfs/7.15%20After%20plunging%20~80%25%20in%20Q1-1.png)
Source: WSJ Daily Shot, from 7/15/20
5. Here is an example of food inflation:
![](https://blog.investbcm.com/hubfs/.15%20Here%20is%20an%20example%20of%20food%20inflation-1.png)
Source: WSJ Daily Shot, from 7/15/20
6. Equivalent rent is the large housing component in the CPI. College and other young adults staying home and other Covid effects has moderated this component…
![](https://blog.investbcm.com/hubfs/.15%20Equivalent%20rent%20is%20the%20large%20housing%20component%20in%20the%20CPI-1.png)
Source: WSJ Daily Shot, from 7/15/20
7. Is the deficit (and thus debt) driving inflation expectations?
![](https://blog.investbcm.com/hubfs/7.15%20Is%20the%20deficit%20(and%20thus%20debt)%20driving%20inflation%20expectation-1.png)
Source: WSJ Daily Shot, from 7/14/20
8. Banks are preparing for the inevitable…
![7.14](https://blog.investbcm.com/hs-fs/hubfs/7.14.png?width=563&name=7.14.png)
Source: Statista, from 7/14/20
9. An unintended consequence of negative interest rates…
![](https://blog.investbcm.com/hubfs/7.15%20An%20unintended%20consequence%20of%20negative%20interest%20rates-1.png)
Source: WSJ Daily Shot, from 7/14/20
10. This is not about politics…it is about helping each other stop a pandemic. Until we have more data and a deeper understanding of this disease and how it spreads, we should take extra precautions.
![7.15 This is not about politics...-2](https://blog.investbcm.com/hs-fs/hubfs/7.15%20This%20is%20not%20about%20politics...-2.png?width=690&name=7.15%20This%20is%20not%20about%20politics...-2.png)
Source: Nicole Foreman, from 7/14/20