Slashed profit expectations may set stage for gains

Slashed profit expectations may set stage for gains

Reuters  | Jan 11, 2019 07:48PM ET

Slashed profit expectations may set stage for gains

By Caroline Valetkevitch

NEW YORK (Reuters) - There could well be a silver lining in all the caution around the stock market as the earnings season approaches: Shares do way better when profit expectations have fallen, and lately, they've been falling like a rock.

By at least one measure, this is the most negative analysts have been ahead of a reporting period in nearly four years. Fourth-quarter reports get rolling next week with results from JPMorgan Chase (N:JPM) and other big banks.

Recent warnings on the quarter from high-profile companies have had investors bracing for more bad news. Earlier this month, Apple's (O:AAPL) big cut in its revenue forecast added to fears among some market watchers that a possible 2019 earnings recession - defined as at least two straight quarters of profit declines - may be on the horizon.

With the bar low for companies to beat expectations, stocks could extend recent gains following the S&P 500's (SPX) worst December performance since the Great Depression.

"One of the key things the December selloff did was it priced a materially reduced set of earnings expectations for 2019. As a result, investors are going to be somewhat forgiving of companies who either miss estimates or are somewhat tentative in their guidance because they are now expecting that," said Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley (NYSE:MS) Wealth Management in New York.

"Any companies that talk about 2019 being just as good as 2018 or even sequentially a lot better are going to constitute an upside surprise," she said.

Case in point: General Motors. GM's (N:GM) shares soared more than 9 percent on Friday after the company said its earnings would top its earlier forecast.

Coming into that surprise announcement, Wall Street's estimates for GM's fourth-quarter profit had fallen by 12 percent since late October and the stock had dropped more than 20 percent over the last year.

While still relatively strong at 14.5 percent, analysts' estimated profit growth for S&P 500 (SPX) companies in the fourth quarter has fallen sharply since the start of October, when they forecast growth of 20.1 percent, according to IBES data from Refinitiv.

For 2019, analysts are expecting profit growth of just 6.4 percent, down from an Oct. 1 estimate of 10.2 percent and a big drop from 2018's tax cut-fueled gain of more than 20 percent.

(GRAPHIC: Falling S&P 500 profit growth forecasts - https://tmsnrt.rs/2H80Idq)

According to strategists at Bespoke Investment Group, the bar for this earnings season is "extremely low."

Heading into the fourth quarter, Bespoke analysts' earnings revisions for S&P 1500 companies are skewing more negatively ahead of any reporting period since the first quarter of 2015, they wrote in a report on Thursday.

The S&P 500 rallied 2.62 percent in that six-week reporting period, and there have been just four prior earnings seasons since 2009 - when the U.S. bull market began - in which the earnings revisions spread for the S&P 1500 was more negative than it is now, they said.

In each of those periods, the S&P 500 rose for an average gain of 4.33 percent.

"Analyst sentiment doesn't get much more negative than it is now, so if we start to see companies react positively to results early on, it would set the stage for a positive earnings season," the Bespoke strategists wrote.

To be sure, the S&P 500 uncharacteristically declined 5.2 percent in the last earnings period despite negative earnings revisions, according to Bespoke's data.

That "proved to be a major exception" to the trend, they wrote.

Market valuations also have come down substantially. With the S&P 500 now trading near 14.9 times expected earnings, according to Refinitiv data, compared with a multiple of 18 a year ago, market bulls argue that stocks have become undervalued after the recent sharp declines.

Investors also will be listening closely to what executives say about demand in China.

Apple cited slowing iPhone sales in China when it cut its sales forecast for the quarter that ended in December.

Comments about China and its trade conflict with the United States are likely to come up in conference calls and could affect investor sentiment, regardless of the earnings numbers.

"The commentary we're going to get on China and trade is going to be potentially pretty bad. It's almost like companies reserving for things that could go wrong in future quarters," said Jonathan Golub, chief U.S. investment strategist at Credit Suisse (SIX:CSGN).

Some strategists said what could make it a successful earnings season from the market's standpoint might simply be any signs that 2019 earnings estimates are stabilizing.

© Reuters. Traders work on the floor of the NYSE in New York

"Just showing that these numbers are not falling off a cliff" will be positive, said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. "That's what the market was pricing in."

Related News

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Dave Jones
Dave Jones

Orwellian double think. Companies doing terrible. expect stock market to skyrocket   ... (Read More)

Jan 12, 2019 02:53AM GMT· Reply
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (UK) English (India) English (Canada) English (Australia) English (South Africa) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 中文 香港 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+