March 22, 2019 / 5:35 PM / 3 months ago

Wall St Week Ahead-Doubts increase that Q1 will be earnings low point

    By Caroline Valetkevitch
    NEW YORK, March 22 (Reuters) - As Wall Street braces for
what may be the first U.S. profit decline since 2016, investors
say the first quarter may not mark the low point for 2019
    Concerns about economic weakness in the United States and
abroad and the lack of a U.S.-China trade deal are hanging over
the outlook, even as the Federal Reserve's dovish stance on
interest rates is expected to relieve some of the pressure on
    Another potential reason to worry: the spread between yields
on Treasury bills            and the 10-year note            , a
closely watched signal on the health of the economy, inverted on
Friday for the first time since 2007.             
    As stocks sold off in December, some investors worried that
2019 would bring a profit recession for S&P 500 companies
      , with at least two quarters of year-over-year declines.
The last U.S. profit recession ran from July 2015 through June
of 2016.
    Analysts reduced their earnings forecasts for the year as
well. They now expect a 1.7 percent year-over-year earnings
decline in the first quarter, with some profit growth in the
rest of 2019, according to IBES data from Refinitiv.
    With the market's rebound this year, the Fed on pause and
some expecting economic growth to improve after the first
quarter, optimism seemed to be increasing that the profit
outlook would stabilize after hitting a low point in the current
    "It would be great if Q1 represented a low point, but I'm
not betting on it," said Jack Ablin, chief investment officer at
Cresset Capital Management in Chicago.
    "I worry that the comparisons are going to be much more
difficult as we navigate the rest of the year."
    This year's earnings already were expected to shrink
dramatically compared with 2018, when steep corporate tax cuts
fueled earnings gains of about 24 percent.
    But since the start of the year, the forecast for
second-quarter profit growth has fallen to 3.0 percent from 6.4
percent, while estimated growth for the third quarter has
dropped to 2.7 percent from 4.9 percent, based on Refinitiv's
data. The fourth-quarter growth estimate has come down as well,
though it is still relatively strong, at 9.1 percent, based on
Refinitiv's data.
    Those numbers could keep falling, while the first-quarter
forecast is likely to improve from here. Since 1994, earnings
have surprised to the upside on average by 3.2 percent,
according to Refinitiv data, which suggests first-quarter
results could finish in positive territory. 
    Still, with investors largely discounting weaker earnings
trends, the first-quarter reporting period could bring market
volatility, Ameriprise Financial strategists said. 
    On Tuesday, FedEx Corp.         cut its 2019 profit forecast
for the second time in three months, causing its stock to drop
and raising fresh worries about the impact of the trade conflict
on earnings, with the company citing slowing global economic
conditions and weaker trade growth.             
    Also, Nike's         shares were down more than 5 percent on
Friday after it reported North American sales that fell short of
    The United States and China were scheduled to reach a deal
on trade by March 1, but the White House has said it needed more
    "You need this trade dynamic to kind of get a little bit
better. There are real concerns. FedEx's numbers are a perfect
example. There's been a global growth slowdown and companies are
communicating that in terms of their guidance for the first
quarter and throughout the year," said Anthony Saglimbene,
Ameriprise's global market strategist.    
    To be sure, a lot of those fears could be reversed if there
is a resolution in the U.S. trade conflict with China, and if
companies' reports are surprisingly upbeat, he said.
    Strategists said they expect to hear more from companies on
the trade conflict when first-quarter reporting kicks into high
gear around mid-April.
    "So much is dependent on what we do with the trade situation
with China. The real issue will be the global economy, and in
particular, trade with China," said Rick Meckler, partner at
Cherry Lane Investments, a family investment office in New
Vernon, New Jersey.

 (Reporting by Caroline Valetkevitch; Editing by Alden Bentley)
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