Reduced earnings expectations could prepare for gains


By Caroline Valetkevitch

NEW YORK (Reuters) – Prudence should prevail as the results season approaches: equities are much better when earnings forecasts fall and they drop like rocks in recent times.

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<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Recent warnings on the quarter of high-profile companies Earlier this month, Apple's The Recent Warnings Issued on the Horizon "The Latest Warnings Issued" by leading companies in the quarter have prompted investors to prepare for other bad news. Earlier this month, Apple The sharp reduction in its revenue forecast has added to fears of some market watchers that a possible earnings recession for 2019 – defined as at least two consecutive quarters of declining earnings – could be on the horizon.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "With the bar low for companies to beat expectations, stocks could extend recent gains following the S & P 500's <.SPX> worst performance with the Great Depression. "data-reactid =" 26 "> With a low bar for companies to exceed expectations, equities could prolong recent gains from the S & P 500 index <.SPX> December's worst performance since the Great Depression.

"One of the key elements of the December sale has been setting a set of significantly reduced earnings expectations for 2019. As a result, investors will somewhat forgive companies that are missing their estimates or are somewhat shy in their now expects that, "said Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management in New York.

"All companies that talk about 2019 as good as 2018, or even sequentially better, will be a positive surprise," she said.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Case in point: General Motors. "data-reactid =" 29 "> Example: General Motors .GM Stocks climbed more than 9% on Friday after the company announced that its earnings would exceed its previous expectations.

On the eve of this surprise announcement, Wall Street's earnings estimates for the fourth quarter of GM had dropped 12% since the end of October and stocks had fallen more than 20% in the past year.

<p class = "canvas-atom-text-canvas Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "While still relatively strong at 14.5 percent, analysts" estimated profit growth for S & P 500 <.SPX> companies analysts believe that S & P's earnings growth is expected to grow 20.1 percent, according to IBES data from Refinitiv. "data-reactid =" 31 "> Analysts say earnings growth at S & P 500, which remains relatively strong at 14.5% <.SPX> Businesses in the fourth quarter have fallen sharply since early October, when they forecast 20.1% growth, according to Refinitiv's IBES data.

For 2019, analysts expect earnings growth of only 6.4%, down from 10.2% at October 1 and a sharp decline from a gain of more than 20% driven by tax reduction of 2018.

(GRAPHIC: S & P 500 earnings growth forecasts down –

According to the strategists of Bespoke Investment Group, the bar for this season of results is "extremely low".

At the dawn of the fourth quarter, the revisions to the Bespoke analysts' results for the S & P 1500 companies are more negative than expected since the first quarter of 2015, he wrote in a report released Thursday.

The S & P 500 gained 2.62% during this six-week reporting period, and there have been only four seasons of previous results since 2009 – when the US bull market started – in which the profit revisions gap of the S & P 1500 was more negative than now. , they said.

During each of these periods, the S & P 500 index rose 4.33% on average.

"The sentiment of analysts does not become much more negative than today, so if we start seeing companies react positively to the results, it would pave the way for a positive earnings season," writes the strategists. of Bespoke.

Admittedly, the S & P 500 Index experienced an unusual 5.2% decline over the last earnings period, despite negative earnings revisions, according to Bespoke data.

This "has turned out to be a major exception" to the trend, they wrote.

Market valuations have also declined considerably. According to Refinitiv data, the S & P 500 index trading nearly 14.9 times expected earnings, compared to a multiple of 18 a year ago, stock markets say stocks have become dumped after the sharp declines recorded recently.

Investors will also listen to what the leaders say about demand in China.

Apple spoke of the slowdown in iPhone sales in China when it reduced its sales forecast for the quarter ended in December.

The comments on China and its trade dispute with the United States are likely to be the subject of conference calls and affect the morale of investors, regardless of the revenue figure.

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"The comment we're going to make on China and trade is potentially very bad – it's almost like companies booking for things that could go wrong in the coming quarters," said Jonathan Golub, strategist chief of US investment at Credit Suisse.

Some strategists have said that what could make the season of the results a success, from a market point of view, could simply be a sign that the earnings estimates for 2019 are stabilizing.

"Just showing that these numbers are not going to go down" will be positive, said Keith Lerner, market strategist at SunTrust Advisory Services in Atlanta. "That's what the market has taken into account."

(Report by Caroline Valetkevitch, edited by Dan Grebler)