NEW YORK: As Wall Street braces for what may be the first US profit decline since 2016, investors say the first quarter may not mark the low point for 2019 earnings.
In the immediate term, markets could be roiled depending on what or if any information is released from Special Counsel Robert Mueller’s report on his investigation into Russia’s role in the 2016 presidential election, which was submitted to Attorney General William Barr late on Friday.
Concerns about economic weakness in the United States and abroad and the lack of a US-China trade deal are hanging over the longer-term outlook, even as the Federal Reserve’s dovish stance on interest rates is expected to relieve some of the pressure on companies and the economy.
In a troubling sign for the US outlook, a report on Friday showed US manufacturing activity unexpectedly cooled in March, and the spread between three-month Treasury bills and 10-year note yields inverted for the first time since 2007.
An inverted Treasury yield curve is seen as a warning of a coming recession.
As stocks sold off in December, some investors worried 2019 would bring a profit recession for S&P 500 companies, defined as at least two quarters of year-over-year declines. The last US profit recession ran from July 2015 through June of 2016.
Analysts, after cutting earnings forecasts for 2019, now expect a 1.7 percent year-over-year earnings decline in the first quarter, and some profit growth for the rest of the year, according to IBES data from Refinitiv.
With the Fed on pause and stocks rebounding, optimism seemed to be increasing that the profit outlook would stabilise after hitting a low point in the current quarter. Many investors say that is now less certain.
“It would be great if Q1 represented a low point, but I’m not betting on it,” said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.
“I worry that the comparisons are going to be much more difficult as we navigate the rest of the year.”
This year’s earnings growth already was expected to shrink dramatically compared with 2018, when steep corporate tax cuts fuelled earnings gains of about 24 percent.
Since the start of the year, the forecast for second-quarter profit growth has fallen to 3.0 percent from 6.4 percent, while estimated growth for the third quarter has dropped to 2.7 percent from 4.9 percent, based on Refinitiv’s data. The fourth-quarter growth estimate has come down as well, though it is still relatively strong, at 9.1 percent. – Reuters
