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Earnings outlook amid coronavirus market volatility

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Charles Schwab Chief Global Strategist Jeffrey Kleintop joins Yahoo Finance’s Seana Smith to discuss how the coronavirus may impact earnings season, as big banks gear up to report results Tuesday.

Video Transcript

SEANA SMITH: And for more on the markets, I want to bring in Jeffrey Kleintop, Chief Global Strategist at Charles Schwab. And Jeffrey, thanks so much for taking the time this afternoon. Lots of talk about just in general the action that we've seen, the recent action in the markets. It almost seems like we turned a corner last week when we saw the massive rally that was underway for most of the week. Today, though, we are giving back some of those gains. What's your read about where we stand right now?

JEFFREY KLEINTOP: I think the-- where the market's head is at has advanced so much. I mean, I don't overlook the fact that we're talking about maybe the end of the recession here, if in fact we do see the economy begin to open over the course of the next month or two. And by the way, we're already seeing that outside of the US. Austria is opening today. On Wednesday, I think it's Denmark that's opening. Norway on Friday.

So as we get a resumption of some economic activity, we may start to see May or even June economic data exceed where we've been. So that would mark the end of the downturn, but we don't know what the recovery looks like. And that's why we're going to have to watch this data very closely, and why I think the market's stuck here today after this rally on the idea that maybe the worst is over, but we don't know what the future looks like.

Again, we'll have to watch very closely. Countries like Korea have been able to contain the spread of the virus and engage in economic activity. We'll have to see if that's true, as well, for some of these European economies opening this week. That'll be important to assessing how well New York, New Jersey, Pennsylvania, so many of the other states we just heard from are going to do as they begin their states' reopenings.

SEANA SMITH: Yeah, Jeffrey. I know you're saying that there's still so much uncertainty out there, but I want to drill down just on what we could expect potentially this recovery to look like. What areas do you expect to lead us in the right direction?

JEFFREY KLEINTOP: Well, I think what's-- there is, I think, likely to be a rebound in demand in terms of manufacturing restocking things across the supply chain. I think it's going to be important. So expect to see an uptick in manufacturing activity come back. And that does drive a lot of profits, more so than it drives the overall economy. So it could lead to maybe a little bit more optimism about the earnings rebound.

Where we won't see it, of course, I think is in those more service-oriented areas. It's going to take a while for people to go back to restaurants, to book hotels, flights, those types of things. That could take a bit longer. So there's definitely haves or have nots as we go through this recovery, but restocking that supply chain is job one.

SEANA SMITH: Yeah, and when we go-- just what we could expect to hear over the next couple of weeks, the big thing that investors are looking at is earnings. And we know it's a pretty cloudy picture at this point, and estimates are all over the place, and rightfully so. But if you were to try and drill down on just what your expectations are for earnings at this point, what are they?

JEFFREY KLEINTOP: Well, in a typical recession, earnings fall 25% to 30%. That seems like it could be something that's quite reasonable this time, but capsulated in a very short amount of time. I mean, you've had a number of businesses simply out of production even before the economic shutdowns took place. They simply-- the supply chains began to dry up, and so they were unable to produce.

So that lasted a bit longer, for at least maybe half of the quarter. So looking at that, I think that's the baseline to look at. Going forward, we don't know what the recovery looks like. So how stocks react to that and what companies can tell us about their visibility into the second half of the year I think is still going to be very limited at this stage.

SEANA SMITH: And Jeff, I want to get your take just on what we're seeing in energy today, because it is a little bit of a bright spot when you take a look. It's the only sector that's barely holding onto gains. Oil, though, did just turn lower, off just around, what, 1% right now. But when we talk about how the move in oil, how this agreement that was reached by OPEC+, how that could potentially stabilize the markets, how do you read that at this point?

JEFFREY KLEINTOP: Well, it's a very limited agreement. I think that's why the market's maybe a little disappointed, not more enthusiastic about how the deal's come together. Remember, this cut in output of nearly 10 million barrels per day only applies to two months, May and June. And then those cuts pull back a little bit, to 7.7 million barrels per day. And we're not quite sure the extent to which Canada, Brazil, and other producers are going to kick into all of that. Even if they all kicked in and it was something around 15 to 20 million barrels per day, I think the estimates right now are for a demand cut of 30 or more.

So we're still not even capturing the whole balance between supply and demand. And that's keeping a lid on where crude prices would go here in the near term. It's not, however, affecting some of the other commodities. Copper has shown a little bit more upside here lately. And that's maybe a better sign of this industrial recovery I was talking about.

SEANA SMITH: Jeffrey Kleintop of Charles Schwab, thanks so much for joining us today.

JEFFREY KLEINTOP: Thanks for having me.