When U.S. stocks posted their worst December since the Great Depression, traders put plenty of the blame on actions by the Federal Reserve and that other favorite scapegoat, computerized trading.
But now it seems clear that the market was mostly anticipating what has actually happened in recent days: Companies are cutting profit forecasts and trying to temper expectations for earnings growth this year after a big 2018.
Along with Apple and other companies projecting lower sales, home builder Lennar Corp. said last week (Jan. 9) that it would delay putting out a 2019 forecast because of “softness” and “uncertainty” in the housing sector.
‘Now starting to come to the fore’
Interest rate hikes by the Fed have contributed to weaker demand for mortgages and home purchases, but there are other reasons for the late-2018 market decline. Maneesh Deshpande, the head of U.S. equity strategy at Barclays, outlined several factors, including U.S. political turmoil — the federal government is in week three of a partial shutdown — a weakening Chinese economy and bearish sentiment by retail investors.
Barclays cut its S&P price target for 2019 to 2,750 from 3,000, still up 6 percent, and lowered its projected S&P EPS to $171 from $176.
Morgan Stanley’s Michael Wilson, also a chief U.S. equity strategist, told CNBC that he has left his S&P price target unchanged at 2,750. “All of the things that we’ve been worried about, the market’s been worried about all year, are now starting to come to the fore.”
For the fourth quarter, which for many companies ends in December, 72 S&P 500 companies have issued earnings warnings, twice as many as have issued positive guidance, according to FactSet. Earnings growth rates have been revised lower by companies in all 11 S&P sectors.
Projecting Earnings Growth
It’s possible S&P could have earnings growth of more than 15 percent for the fourth quarter, but that would be below the 25 percent notched for each of the previous three quarters, FactSet research said.
And analysts are now looking for single-digit earnings growth for the next three quarters of this year. While fourth quarter 2018 earnings growth is projected to be 11.4 percent, the first quarter projection is for 2.9 percent growth, then 3.7 percent in the second quarter and 4.3 percent in the third.
“In the last three months of 2018, markets were pricing in no earnings growth, and perhaps even negative growth, in 2019,” says Earnings Scout’s Nick Raich. “The good news is that markets likely overshot just how much 2019 EPS estimates were going to drop.”
Stocks have rebounded so far in 2019 as investors make a bet that the bad news yet to come this earnings season is priced in.