Wall Street analysts have slashed their estimates for US corporate earnings in the first quarter and now expect the first year-on-year decline in almost three years.
Consensus estimates point to a 0.8 per cent drop in earnings per share this quarter, according to FactSet, a dramatic markdown from a forecast of 3.3 per cent growth at the end of December. If expectations prove true, it would be the first such contraction since the second quarter of 2016.
Concerns about earnings growth in 2019 surfaced last year and the outlook has continued to darken as the reporting season for the fourth quarter progressed.
With about half of the companies in the S&P 500 having reported their results, earnings for the fourth quarter rose 12.4 per cent overall. But corporate tax cuts boosted profitability last year, setting up less flattering comparisons for 2019. What is more, the US has endured brutal cold snaps of late and companies have had to contend with the uncertainty of the longest government shutdown in US history.
Still, the pressure was seen more on margins than top-line growth, forecasts showed.
Margin deterioration is going to be a big theme this year
The drop in earnings forecasts came alongside a more modest decline in expected revenues for S&P 500 companies. Analysts were expecting top-line growth of 5.7 per cent this quarter versus 6.5 per cent as of December 31.
“Margin deterioration is going to be a big theme this year,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “What is driving that deterioration is higher labour costs and the friction created by the trade war, which disrupts supply chains.”
Various sectors of the S&P 500 were facing risks including commodity prices and the slowdown in China.
DowDupont, the chemicals group, was one of the companies warning about a margin squeeze.
Howard Ungerleider, chief financial officer, said the company expected its petrochemicals and plastic division, set to be spun off by April 1 as a new Dow, would report operating earnings down more than 20 per cent in the first quarter, hit by a decline in margins that started last year and has continued into 2019.
Meantime, energy companies led the decline in earnings estimates for the first quarter as a slide in oil prices late last year cast the 2019 outlook in doubt. Analysts were predicting a nearly 6 per cent drop in first quarter EPS for energy companies versus expectations of an increase of 16.5 per cent at the end of 2018.
John Rielly, chief financial officer of the exploration and production company Hess, told analysts on a call last week that “all we’re doing now is trying to manage uncertainty” following the fall in oil prices in the past four months.*
Brent crude has dropped from more than $86 a barrel in early October to just under $63 at the end of last week.
Forecasts for the tech sector, home to Apple and chipmakers, went from a 2.2 per cent decline in profitability to an 8.9 per cent drop.
Some high-profile tech companies have also raised the red flag on sales.
Apple shocked investors in January by warning that a downturn in Chinese consumer spending and slower pace of iPhone upgrades globally meant the company would miss its own sales estimate last quarter for the first time in more than 15 years. Guidance for the current quarter was below the Wall Street consensus.
Amazon raised worries with a cautious first-quarter sales forecast that came in below Wall Street estimates because of regulatory changes in India that forced the retailer to pull products from its site there. The company said it also expected to ramp up spending in 2019, which could eat into margins.
Even as analysts dialled back their profit forecasts last month, investors bid up stocks by 7.9 per cent in January, the best start to the year since 1987. Investors have pointed to a dovish outlook from the Federal Reserve and rebound from oversold conditions in December as reasons for the rise.
“The market is trading on the hope that this is a temporary issue and that we start to see some growth in the second quarter and that the back half of the year should be a whole lot better,” said Nicholas Colas, co-founder of DataTrek.
Wall Street analysts were calling for quarterly earnings growth of 1.6 per cent, 2.7 per cent and 9.9 per cent, respectively, for the last three quarters of the year.
Additional reporting by Tim Bradshaw and Shannon Bond
*This story has been amended since original publication to attribute the quote to John Rielly, chief financial officer of Hess.