Rally To Continue Despite Likely Q1 Earnings Dip: 5 Picks

Wall Street is gearing up for the first-quarter 2019 earnings season, which will kick off later this week. Investors are cautious owing to a widespread notion that first-quarter earnings will decline year over year for the first time since the second quarter of 2016.

However, the quarter’s earnings decline may be a temporary phenomenon as several catalysts are there to drive corporate earnings in the near future. Consequently, the stock market rally, which started at the beginning of this year, has a high chance of continuing.

First-Quarter Earnings Dip May be Temporary

Expectations for first-quarter 2019 earnings are far from encouraging at present. Total earnings of the S&P 500 Index are anticipated to be down 4% from the same period last year. Broad-based margin pressure across all major sectors is the primary reason for an expected earnings decline. (Read More: Previewing Bank Earnings)

However, earnings results of the prior-year quarter were highly benefited for the first time by a major tax haul by the Trump administration that sharply lowered the corporate tax rate from 35% to 21%.

Global economic slowdown also affected first-quarter earnings. China’s manufacturing rebounded only in March while Eurozone is still reeling under an economic downturn. Moreover, a record-setting, 35-day partial government shutdown also heavily dampened first-quarter economic activity.

However, there are several positive factors in the economy that will enable Wall Street to sustain its rally.

Recessionary Fear Overblown

The U.S. labor market is the major driver of the bull run to continue in the stock market even after a decade. On Apr 5, Bureau of Labor Statistics reported that non-farm employment in March was 196,000, higher than the consensus estimate of 184,000. Unemployment rate came down to its 50-year low level of 3.8%.

On Apr 1, the Institute for Supply Management (ISM) reported that U.S. manufacturing expanded in March for the 119th consecutive month. The March index came in at 55.3, easily surpassing the consensus estimate of 54.5.

With strong economic data, recessionary fear in the United States faded away. Yield on 20-year U.S. Treasury Notes stayed at 2.503%, higher than the 3-month U.S. Treasury Bill’s yield of 2.39%. Notably, yield inversion between these two government bonds in the last week of March prompted concerns about an impending recession in the U.S. economy.

No Inflationary Expectation

Job data for March also revealed that average wage rate increased 0.14%, below the consensus estimate of 0.2%. The wage rate increased 3.2% year over year, below the consensus estimate of 3.4%. Lower unemployment along with lower wage growth has eliminated inflationary expectations which will enable the Fed to stick to its stand of not raising interest rate in 2019.

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Positive Development on Trade Front

The year-long tariff dispute between the United States and China is likely heading for a solution. On Apr 6, President Donald Trump’s top economic adviser Larry Kudlow said that the United States and China are “closer and closer” to a trade deal.

Per China’s Xinhua News Agency, China’s president Xi Jinping has written in a letter to President Trump calling for negotiations to end the trade dispute as soon as possible. President Trump said that the U.S.-China trade deal “have a ways to go, but not very far.”

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At this stage, investment in stocks with strong earnings estimates revision and positive Zacks Investment Research

Written By: Zacks Investment Research