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Earnings Predictions Scare Investors

February 11, 2019 By Young Research

By alphaspirit @ Shutterstock.com

Earnings growth has begun to slow, and investors are getting worried. Justin Lahart reports for The Wall Street Journal:

The earnings slowdown owes something to last year’s corporate tax cut reaching its anniversary date: Credit Suisse strategist Jonathan Golub calculates that the tax cut added about 7 percentage points to earnings growth in the fourth quarter.

The slowdown also owes something to one big company: Apple . First-quarter estimates for the iPhone maker, which accounted for over 4% of S&P 500 net income last year, have come down sharply since the company issued a revenue warning in early January.

But it is more than just Apple: First-quarter estimates have fallen significantly across most sectors. And the slight earnings growth that analysts expect to see in the first quarter wouldn’t even be there if it weren’t for all the shares companies have bought back over the past year. Analysts expect S&P 500 net income (as opposed to earnings per share) to be down 2.6% from a year earlier in the first quarter, according to Refinitiv.

When earnings growth falls sharply, stocks often languish. That is especially true of so-called profits recessions, when earnings fall below their year-earlier level. The last time that happened was during the period spanning the third quarter of 2015 through the second quarter of 2016—a volatile time in which the S&P 500 gained all of 1.7%.

But profits recessions also tend to favor shares of the relatively limited number of companies that are able to keep growing strongly. That doesn’t appear to have happened yet. Instead, the rebound in the stock market off its late December lows has been wide-ranging, including the shares of all manner of companies.

Read more here.

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