Climbing the ever-present wall of worry, stock investors fear that we are in for an earnings tumble this year. And the market, which views earnings as the leading indicator for its future, doesn’t take kindly to such a dour prospect.
There’s a case to be made, though, that an earnings recession—defined as two successive quarters of earnings per share decline—will not happen. Yes, S&P 500 earnings likely won’t be as robust as we saw in 2018, which featured double-digit advances for each period. (Reports for last year’s final quarter, almost completed, indicate an increase of around 15%.)
Why the drop in EPS growth? Economic slowdowns in China and Europe, the trade war, and some discouraging signals in the US, such as Thursday’s report on January’s slip in new-home sales, marking the third month of lower numbers, are all factors. The partial government shutdown didn’t help.
One reason that the current quarter (January-March) is expected to show an earnings decline is that the results will be compared to 2018’s strong first quarter, which logged a 15.1% increase. “The Q1 2019 earnings reporting period is rapidly approaching,” wrote Sam Stovall, CFRA’s chief investment strategist, in a research note. “Now the tough sledding begins.”
The latest investors’ survey shows a rise in pessimism, with a 4.3 percentage point climb from the week before, to 31.1% bearish. The survey, from the American Association of Individual Investors, still indicated an edge for bullishness (32.4%), but that was down 5 points.
The analysts’ consensus, according to FactSet Research Systems, is for a 3.4% EPS decrease for the first quarter. But then comes a muted, but positive and accelerating, growth pattern: 0.2% in the second quarter, 1.7% in the third, and 8.1% in the fourth. Admittedly, these forecasts are highly changeable. At the end of last December, the estimate was for a 2.8% increase in the current quarter.
Brad McMillan, chief investment officer for Commonwealth Financial Network, draws encouragement from progress on the Sino-American trade tiff talks and renewed Chinese economic stimulus—which should at least prevent earnings tumbling into negative territory up ahead.
“An earnings recession in the short term requires everything to go wrong,” he wrote in a note. “But just as everything almost never goes right, it makes no sense to bet on everything going wrong either.”
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