March 22, 2019 / 10:05 PM / 5 months ago

UPDATE 1-Wall St Week Ahead-Doubts increase that Q1 will be earnings low point

 (Adds graphic, details on Friday's economic reports)
    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
earnings.
    In the immediate term, markets could be roiled depending on
what or if any information is released from Special Counsel
Robert Mueller's report on his investigation into Russia's role
in the 2016 presidential election, which was submitted to
Attorney General William Barr late on Friday.               
    Concerns about economic weakness in the United States and
abroad and the lack of a U.S.-China trade deal are hanging over
the longer-term outlook, even as the Federal Reserve's dovish
stance on interest rates is expected to relieve some of the
pressure on companies and the economy.
    In a troubling sign for the U.S. outlook, a report on Friday
showed U.S. manufacturing activity unexpectedly cooled in March,
and the spread between three-month Treasury bills            and
10-year note             yields inverted for the first time
since 2007.                           An inverted Treasury yield
curve is seen as a warning of a coming recession. 
    As stocks sold off in December, some investors worried 2019
would bring a profit recession for S&P 500 companies       ,
defined as at least two quarters of year-over-year declines. The
last U.S. profit recession ran from July 2015 through June of
2016.
    Analysts, after cutting earnings forecasts for 2019, now
expect a 1.7 percent year-over-year earnings decline in the
first quarter, and some profit growth for the rest of the year,
according to IBES data from Refinitiv.
    With the Fed on pause and stocks rebounding, optimism seemed
to be increasing that the profit outlook would stabilize after
hitting a low point in the current quarter. Many investors say
that is now less certain.
    "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 growth already was expected to shrink
dramatically compared with 2018, when steep corporate tax cuts
fueled earnings gains of about 24 percent.    
    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.
    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 S&P 500 companies
will post an earnings gain for the first quarter.
    Still, with investors largely discounting weaker profit
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. The company cited slowing global economic
conditions and weaker trade growth.             
    Also, Nike's         shares fell 6.61 percent on Friday
after it reported North American sales that fell short of
expectations.             
    The United States initially had a deadline to reach a deal
on trade with China by March 1, but the White house has said it
needs more time.
    "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,
global market strategist at Ameriprise Financial in Troy,
Michigan.
    To be sure, a lot of those fears could be reversed if there
is a resolution in the U.S.-China trade conflict, and if
companies' first-quarter reports are not as weak as expected, 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
and Chris Reese)
  
 
 
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