US corporate earnings: no storm, but tailwinds easing

Thought of the day

by Chief Investment Office 11 Jan 2019

From tech to retail, recent headlines on US corporate earnings have alarmed investors. On 10 January, retailer Macy’s shares plunged 18%, their worst-ever one-day loss, after the company cut its annual earnings forecast. Last week, Apple shares dropped almost 10% after the company issued its first revenue warning since 2002, citing weaker growth, particularly in China.

But despite the negative press reports, we think 4Q earnings results and the outlook for 2019 should turn out better than feared:

  • Fourth quarter earnings per share growth is set to decelerate on tougher comparisons and a slowdown in the tech sector (mostly in hardware and semi-conductors) but is still likely to reach around 15%, in our view. The detail of early reporters' results has been better than the negative headlines in a number of cases.
  • We expect earnings per share growth (EPS) of 4.5% in 2019. There are downside risks to this estimate from the tech, energy and financials sectors (lower oil prices and fewer Fed rate hikes will have an impact in energy and financials respectively). But if there is no further escalation of US trade tariffs this would provide a positive counterbalance to these risks.
  • Analysts’ earnings expectations have been downgraded sharply recently. According to the Citi global earnings revision index the number of analyst downgrades exceeds upgrades by the most since 2009. But from a US perspective, downgrades have merely brought consensus forecasts down close to our own estimates. The bottom-up consensus for 2019 S&P 500 EPS is now USD 172/share, compared with our estimate of USD 171/share.
    While doom and gloom headlines may present an overly negative picture of the outlook for corporate earnings, we acknowledge that the tailwind for equities from US earnings growth is set to fade. With the tailwind from quantitative easing also set to disappear – for the first time since the 2008 crisis, top central banks will end the year with smaller balance sheets – other positive developments will be needed for the recent equity rally to prove sustainable. The Federal Reserve will need to deliver on their promise of flexibility and the US and China will need to reach an agreement on trade. So while we remain overweight global equities, we also recommend investors continue to hold countercyclical positions and, where appropriate, consider hedging, to navigate market volatility.

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