Earnings Update, Where Do We Go from Here?
After receiving 4Q18 earnings reports from all S&P 500 constituents, total earnings were up around 12% from the same period last year on about 6% higher revenues marking the fifth straight quarter of double-digit earnings growth for the S&P 500. However, great earnings did not coincide with great stock market performance as the S&P 500 ended the year down 4% due to a dramatic fourth quarter sell-off. After a quick rebound from deeply oversold conditions, investors are taking a pause as they consider the likelihood of a potential earnings recession—when corporate earnings per share decline for two quarters in a row versus the year prior.
Earnings Growth and Price Action
March 1989 – March 2019
Source: NYLI Multi Asset Solutions, Thomson Reuters DataStream, IBES. As of 3/12/19. Past performance is no guarantee of future results. An investment cannot be made directly in an index.
Right now, some analysts believe that corporate earnings per share will be lower in 1Q19 than in 1Q18, acknowledging the rising risk that second-quarter earnings may be down year-over-year as well. If correct, this would mark the first significant slowdown in corporate profits since 4Q15 through 2Q16, when oil prices collapsed.
Even Michael Phelps needed a break from winning.
Admittedly, earnings growth will likely be flat for the first part of the year. Right now, corporations are issuing negative earnings guidance, but the bigger driver of lower earnings growth is tough comparables. Last year, corporations’ profit growth set all-time records driven in part by corporate tax reform. Such performance is hard to repeat.
It’s not an exact science.
Negative guidance and short shallow dips in reported earnings are relatively common. They do not necessarily fortell an economic recession or impending poor stock market performance for several reasons. First, corporate management tend to guide analyst estimates lower. On average more than two-thirds of companies, who publicly project earnings, will guide analysts lower in any given quarter. Especially late last year, when the abundance of negative headlines may have provided extra cover to guide expectations lower (and perhaps reduce actual results through write-downs). Second, the price investors pay for earnings varies over time. Even if earnings stall, the market should have a bit more catching up to do based on current valuations.
We are encouraging investors to manage their portfolios through the use of resilient asset allocation and careful stock selection as we go through a near-term speed bump in earnings. That said, we expect a re-emergence of sales and earnings growth in the second half of the year. While growth is no doubt decelerating, it is still positive and largely consistent with this stage of the economic and earnings cycle. What’s more, major risks are fading, creating room for additional market upside. The Fed is much more dovish, and China continues to use fiscal and monetary policy measures to support its economy and meet its targeted growth rates.
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