Quarterly earnings season is upon us once again! The season is dominated by US companies reporting. It is monitored closely by market participants for updates on recent trading and profits earned. Companies also provide forward guidance, allowing investors to set future expectations. This in turn helps analysts determine whether valuations placed on businesses are justified.
2018 was an extraordinary year for US corporate earnings. They were buoyed by;
• loose monetary policy
• synchronised, above trend, global growth
• sizeable US fiscal stimulus, including corporate tax cuts
With earnings soaring last year a high bar has been established for profits to climb over in 2019. To make matters more challenging, global growth has moderated, falling closer to trend levels.
There are various reasons for the current slowdown, not least a change to monetary conditions. The Federal Reserve has raised interest rates 9 times since 2015. Trump’s tax cuts have also faded from memories. As a one-off boost they were great, but in the meantime, US government shutdowns and adverse weather have disrupted economic activity.
Given the shakier backdrop it is not altogether surprising business management teams have been forewarning analysts to lower their earnings forecasts. Current forecasts for the first three months of 2019 for the S&P 500, show that analysts are expecting a quarter on quarter fall of 4.2% in earnings across the index.
Results are now beginning to appear. It is early days, with just 24 companies out of the 500 reporting. So far 20 have reported an earnings surprise, i.e. published results that have exceed analyst expectations. Unfortunately, the small sample size means we are unable to draw meaningful conclusions at this stage.
Companies reporting cover a large swathe of sectors, some economically sensitive and some less so. In the Energy, Materials and Technology sectors companies reporting have issued disappointing forward guidance. Slowing global growth, ongoing tension in US-China trade relations and a lacklustre oil price (now staging a resurgence) have been unhelpful to many businesses in these sectors. On the other hand, companies in the Utilities, Health Care and Services sectors are expected to show greater resilience. These companies are less sensitive to cyclical economic growth.
But what are analyst expecting as the year unfolds? In the graph below, we can see that company profits, represented by earnings per share (EPS), are expected to stabilise in Q2, before growing again in the second half of 2019.
S&P 500 Historic and Forecast EPS
Source: Bloomberg, April 2019
The improvement forecast for the second half of the year is being constantly updated. If profit forecasts shown in our chart prove to be correct, it will signify an end to the slowdown in global growth. It will also represent an elongation of the current growth cycle, underway since the dark days of the credit crisis. Fears raised last year pointing to a possible recession now seem more aligned with a soft patch in a longer series of positive numbers, and the trend is turning up.
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