Grim Earnings Forecasts Are Getting Worse by the Week
More than 80 percent companies that have revised their profit estimates in the lead-up to reporting have slashed them.
(Bloomberg) -- On Wall Street, it’s not exactly a news bulletin when companies cut profit forecasts two weeks before earnings season. It makes it easier to clear a lowered bar, when results are released. Right now, though, something more worrisome may be at work.
More than 80% of S&P 500 companies that have revised their profit estimates one way or the other in the lead-up to reporting have slashed them, data compiled by Bloomberg show. Analysts are in on the action too, reducing company projections at the fastest pace in near three years.
“One of the things that investors seem to be overlooking is how poor the earnings environment is,” said David Spika, president of GuideStone Capital Management. “We’re so focused on monetary policy and this mythical China deal that we just don’t seem to be paying attention to earnings, which are really what should be driving stock prices.”
In and of itself, a flurry of downward revisions is nothing unusual at this time of year. Companies are always more likely to disclose bad news, and a few may be interested in lowering estimates before they report. But the extent of the negativity this time around is notable and is another burden for investors struggling to formulate views on the economy, global trade and the Federal Reserve.
Of S&P 500 companies that have revised their profit outlook over the past couple months, 82% cut, data compiled by Bloomberg show. The proportion bears an eerie similarity to the third quarter of last year, right before stocks plunged nearly 20%. Before that, you have to go back to 2015 to find more pessimism.
Wall Street analysts have been forcefully downgrading estimates too. In June, they cut forecasts on 116 more stocks than they upgraded them for, the worst reading since September 2017, according to Sundial Capital Research. Typically, analysts firm up their forecasts during the last month of a quarter, and this time “they’re worried,” said Sundial’s Jason Goepfert.
“There is some sagging in earnings,” said John Lekas, chief executive officer and senior portfolio manager at Leader Capital. “I’m not disputing that earnings across the board are priced to perfection. You know, you’re going to get some disappointments in there.”
The earnings headwinds have been plenty -- from a relatively stronger dollar in the second quarter to lower oil prices, higher input costs and uncertainty from the ongoing U.S.-China trade war. While a recent truce between the two world superpowers was taken as a positive, the benefit is likely short-lived since company executives are still in the dark on what comes next.
“Companies are still wait-and-see,” Samantha Azzarello, global market strategist for JPMorgan ETFs, said in an interview at Bloomberg’s New York headquarters. “The earnings outlook probably has downside because we didn’t get this resolution of any type.”
Citigroup Inc. is set to kick off the official second quarter earnings season in earnest on July 15, with other large banks following shortly thereafter. After avoiding a profit decline in the first quarter, companies in the S&P 500 will again be tested. Estimates call for a 2.5% drop in earnings for the three-month period ended in June. Should the negative reading hold, it would mark the first profit contraction in three years.
On Wall Street, it’s assumed that companies lower their forecasts only to make beating them easier. With that in mind, earnings-per-share will likely come in positive for the second quarter, according to Jonathan Golub, the chief U.S. equity strategist at Credit Suisse. Strip out the positive effect from share buybacks, though, and an earnings contraction is still in the cards.
Still, it’s not like anyone is calling for Armageddon. A modest decline in the second quarter is expected to be followed by a modest rebound in the third and a 7% gain in the fourth. By the middle of 2020, companies should start seeing double digit profit growth once again, if the forecasts hold true. But with geopolitical tensions lingering and a question mark surrounding global growth, those estimates are feeble.
It’s a high stakes season.
“Even as a macro strategist, I will be watching individual earnings reports,” said Frances Donald, chief economist for Manulife Investment Management. “One of the big reasons is most economists and the Federal Reserve are going to be watching for signs that the uncertainty created by trade tensions have already weighed on the economy. Not just the tariffs themselves, but the lack of visibility into future trade relationships.”
--With assistance from Olivia Rinaldi and Vildana Hajric.
To contact the reporter on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net
To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net
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