Stock Bounce Hits Wall With U.S. Futures Falling Before Earnings

American stocks, up 25% in three weeks, ran into turbulence on the eve of earnings season, with futures on benchmark indexes falling in holiday-thinned trading.

June contracts on the S&P 500 slid as much as 2.2%, erasing a gain of 1.4% and paring last week’s 12% rally, the biggest since the 1970s. The decline came even as the world’s top oil producers agreed to cut global petroleum output by nearly a 10th, putting an end to a price war between Saudi Arabia and Russia. Stock futures fell 0.9% as of 7:04 p.m. in New York. West Texas Intermediate crude was little changed.

Corporate reports due in the next few weeks will provide investors some of the most vivid detail to date on the devastation wrought by the coronavirus on the U.S. economy. Profits among S&P 500 companies are expected to drop more than 11% from a year ago, according to the consensus of analysts compiled by Bloomberg, though many of the forecasts are stale and it’s possible the decline will be worse.

Earnings season promises a slew of new challenges. Besides dealing with messy and sometimes meaningless estimates, investors are seeking a read on everything from solvency risk to the integrity of supply chains and consumer demand at a time when most of Wall Street’s labor force is working from home. While the 17.6% drop in the S&P 500 since mid-February has priced in a fair amount of economic pain, U.S. shares are still trading at relatively rich valuations based on existing projections for earnings in the next 12 months.

“It’s going to be a fits-and-starts market for a while. It’s all trading on non-fundamental data, it’s all virus-related data that the markets are trading on right now,” said Jeremy Bryan, portfolio manager at Gradient Investments, which has about $2.6 billion in assets under management.

Extreme volatility has been the rule in global markets for two months as traders struggle to price in the impact of the virus and the efforts to contain it. On Sunday, Fed Bank of Minneapolis President Neel Kashkari said that without an effective therapy or a vaccine, the U.S. economy could face 18 months of rolling shutdowns as the outbreak recedes and flares up again.

U.S. stocks are coming off of their best week since 1974. Investors looked past staggering jobless numbers and focused on fresh actions by the Federal Reserve to cushion the fallout from the coronavirus. Oil fell as investors saw a supply-curb proposal as insufficient. Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, said U.S. fatalities from Covid-19 may be far fewer than earlier projections.

“I hope against hope this thing turns around really fast, but the reality is I think we are in for a longer period of time,” David Harden, CIO at Summit Global Investments, said.

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