Analyst forecasts have been 'too pessimistic' amid COVID-19: Expert

Opimas CEO Octavio Marenzi, joins Yahoo Finance's Kristin Myers to discuss Wall Street analysts raising Q3 earnings estimates amid the coronavirus pandemic, along with the latest outlook on stimulus negotiations in Congress.

Video Transcript

KRISTIN MYERS: And for our loyal readers of the Yahoo Finance Morning Brief, you would have learned something very interesting this morning. Analysts are doing something that they don't usually do, and that's raising, that's right, and raising their estimates for earnings next quarter. So for more on this, we're joined now by Octavio Marenzi, CEO of Opimas. Thanks so much for joining us, Octavio.

So according to the data that we've gotten from FactSet, earnings estimates have been revised upwards by 1.1% last month. And for anyone wondering how rare that is, this is only the third time that there have been upward revisions in the last nine years. So I guess let's start with that very big question. Why do you think that we are seeing this now?

OCTAVIO MARENZI: Well, I would point out it's also unusual that an upward revision happens this early in the quarter because we're only just one month into the third quarter. And to already be upwardly revising is very unusual. You have to go all the way back to 2008 to see that happen in a similar way.

But you know, your segment so far-- I was listening, was actually very, very negative. And I was hoping this would be a slightly more positive spin on things and would say earnings have been being revised upwards, but really not that much. I mean, if you look at what the forecasts were, they were down 44% in terms of earnings was the original forecast for Q3. And now we're only at minus 36%. So it's looking a bit less awful.

I mean, it was just really, really terrible. Now it's really terrible in terms of what forecasts are. So there's a slight correction there. And I think what you see basically is the analysts have been slightly too pessimistic in terms of their forecasts in this crisis. And you saw that happen in 2008 as well.

So they've looked at what's happened this quarter and said we've got it a bit wrong. And there's been quite a few earnings surprises on the upside this quarter. Maybe we got a bit too wrong for the next quarter. So we should revise that. But we are talking about a very, very small revision. And still we're looking at a forecast that's going to be very solidly negative into Q3.

KRISTIN MYERS: So Octavio, I'm really glad that you mentioned the last time this happened back in 2008 with the financial crisis, you know, essentially hitting the United States. So is there a link there? Do think that analysts are perceiving the market too negatively during this periods of crisis? I mean, for this injection of optimism, should we be saying, listen, it's actually not as bad, perhaps, as we think just because the analysts are so downbeat?

OCTAVIO MARENZI: I think things are pretty bad. I mean, it's very hard to compare the crisis in 2008 to the current one. They are very, very different animals. 2008 was a financial crisis. It started in the financial sector. This has started with an epidemic. They're very, very different animals and very different things.

And I would say in defense of the analysts, it's very, very hard to predict what's going on. All your historical models are out the door. You don't know what's going on, really. Your forecasting capability is just going up in smoke.

So I think we'll have to have some forbearance on the analysts and give them some margin of error, which I think they have been. But I think there's a slight tendency to exaggerate how bleak things are going to be but not that much. I mean, these revisions are very, very small. They're upwards, but very, very small upward revisions.

KRISTIN MYERS: OK, so to that end, even though we have small upward revisions, I mean, there is still a lot of headwinds going forward. We have stimulus, the continuing surge in coronavirus cases. I mean, do you think that this upward revision might get us closer into line with what we might actually see in the third quarter? Or does this mean that we're not going to see any big beats? Or is there a potential for a lot of disappointment going forward?

OCTAVIO MARENZI: I don't think we're going to see any big, big beats. I mean, individual stocks certainly will happen. But entire sectors, I think, is very, very unlikely. I think the analysts have a very good pulse on what's going on and see how things are coming. And so I wouldn't expect any entire sectors to have any big misses or beats in terms of the earnings forecast. Maybe individual stocks were.

We saw this past quarter that Amazon, for example, beat the earnings forecast by quite a margin. But that being said, it actually seemed a bit predictable that people would be buying a lot more online and that Amazon's earnings would go up much further. Apple was a nice surprise. I think another sector that we saw a fairly substantial upwards revision has been in the financial services sector. And there, this whole downturn and the amount of cash that the Fed has pumped into the markets has helped the investing banking activities of these financial institutions much, much more than people had anticipated.

So in financial services too, we've seen quite a dramatic upsurge in terms of the revisions there in terms of earnings forecasts for Q3, where the losses in terms of credit losses hasn't been as bad as people had maybe anticipated. And the earnings on the investment banking side much, much better.

KRISTIN MYERS: Want to quickly ask you about stimulus. It's something that we've been talking about all throughout today's show, of course, as people are expecting, or rather hoping, that they're going to continue to receive some of those benefits, including that $600 extra boost in unemployment. What do you see going forward if, you know, Republicans and Democrats can't get on the same page, if that stimulus is reduced or-- unlikely it would go away. But if it is reduced, I mean, how do you think the markets are going to handle that?

OCTAVIO MARENZI: Well, I don't think there's any chance it's going to go away. It's basically a question of is it going to be the Republican version or the Democrat version or some compromise between the two. Now, both sides want to get this through. And they want to get it through quickly. So I think they're going to just split the difference down the middle more or less and get this thing done.

If that doesn't occur, I would expect that you'll see Donald Trump trying to push for something. There's been talk of him trying to pass some sort of executive order and push that through without going through congressional approval and saying it's a national emergency, we have to do this. So I think the stimulus is going to come. It's going to be very substantial. The details of it remain to be worked out. But it will come. Both sides want this to happen and want it to happen quickly.

KRISTIN MYERS: All right, CEO of Opimas, Octavio Marenzi, thanks so much for joining us today.

OCTAVIO MARENZI: Thank you.