Wall Street is gearing up for a messy earnings season.
An avalanche of macroeconomic risks are expected to make a dent in corporate result, causing analysts to forecast earnings growth will decelerate. Strategists, economists, and investment advisors are looking, most pressingly, for further signs of an economic slowdown, along with the impact of a rising US dollar, the Trump administration’s trade war with China, and some more sector-specific developments.
After all, Apple seemed to set the stage earlier this year for a shaky round of earnings reports when it warned investors revenue would be lower than previously forecast. The culprit, the company said, was mostly weak iPhone sales in China. On Monday, China — the world’s second-largest economy — reported that the value of Chinese imports and exports fell in 2018 by the most in two years.
“Investors should be looking for the impacts of a global slowdown,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Business Insider. “To the extent that American multinationals have international exposure, they can provide insight into whether or not the economic slowdown is concentrated in particular industries or whether it is widespread.”
The stock market’s rally off the December lows stands to stall out if there’s further evidence of a global-economic slowdown, Zaccarelli said.
More pointedly, as UBS’s chief equity strategist Keith Parker told clients on Tuesday, “The market narrative went from synchronized global growth to start 2018 to one of slowing global growth and rising recession risk to end the year.”
This week, 34 S&P 500 companies are scheduled to report quarterly results, according to financial data and software company FactSet. For the fourth-quarter, FactSet’s senior earnings analyst, John Butters, said 72 S&P 500 companies have issued negative earnings guidance (below the five-year average), and 34 S&P 500 companies have issued positive earnings guidance (above the five-year average).
To be sure, analysts have been cutting their earnings outlooks for weeks. They are expecting quarterly earnings growth of 14.5%, the weakest since the fourth-quarter of 2017, according to Yardeni Research.
That compares to a 28.4% year-over-year rise for the third-quarter, “which is sure to mark the peak of the current earnings cycle,” said the firm’s president, Ed Yardeni. More granularly, all S&P 500 sectors except for utilities are expected to report positive year-over-year growth.
On Tuesday, JPMorgan, the nation’s largest bank by assets, reported quarterly earnings that missed analysts’ expectations for the first time in 10 quarters as the firm’s corporate and investment banking revenue disappointed. Meanwhile, Delta, the second-largest US airline, reported quarterly revenue in-line with analysts’ estimates.
Foreign-exchange fluctuations will likely take a toll this quarter, according to Bank of America Merrill Lynch, as the US dollar has risen 6% in the last year against a basket of its peers. The firm estimates foreign-exchange will be a 1.4 percentage-point headwind to year-over-year growth — the biggest such impact since early 2016.
Netflix is one name poised to see a negative impact from foreign-exchange swings, according to JPMorgan. The firm on Monday trimmed its fourth-quarter revenue and operating income estimates for the streaming giant ahead of its earnings report which was due out on Thursday.
Concerns over slowing global growth has taken hold across sectors, and has already been cited by several public companies. There’s been a broad “overestimation in demand,” said Boris Schlossberg, managing director at BK Asset Management.