The second-quarter earning season is about to come in the next weeks and many companies already issued second-quarter earnings-per-share guidance.
What to expect in this scenario of rising uncertainty on financial markets and economies?
Preliminary reports can give us a sort of idea on what to expect in the next weeks and they seem to suggest that the outlook keeps getting worse.
When a large number of companies cut profit forecasts just two weeks before earnings season it is not exactly a good sign.
According to Bloomberg’s data, more than 80% of S&P 500 companies have revised their profit outlook lower. This, in turns, brings analysts to reduce company projections at the fastest pace in near three years.
This kind of percentage is similar to 2015 and Q4 2018, just before stocks lost 20%.
It seems that expectations couldn’t be much lower and the S&P 500 looks set to suffer its first earnings recession in three years.
Why earnings are declining?
Economy and Earnings
Most of the factors for earning declines can be identified in the expectations about the economy.
From a relatively stronger dollar in the second quarter to lower oil prices, higher input cost (like labor, wages, transportations…) and trade wars uncertainty.
The S&P 500 has already seen a surge in the last month.
In this environment where everyone is so focused on monetary policy and the hypothetical deal with China on trade wars, earnings tend to be overlooked.
Investors should put all their attention to earnings because they are what ultimately drives stock prices.
This seems a really poor earning environment One of the key to understand the scenario should be to realize how
In this environment of uncertainty, many companies are still on the “wait and see” mode.
There isn’t a clear idea of how things will play out in this economic environment.
This kind of situation paints a really poor earning environment, no one sees a clear resolution of any type.
In this scenario, companies are also very careful not to exaggerate with their earning targets, carefully trimming them beatable levels before reporting time. When the actual reporting comes out, the outcome might be good for the stock price.
Will it be the worst quarter earning in 3 years?
Will there be an upside surprise?
Although no one knows it for sure, this earnings season is make or break for this market.
Is it a boom or a bust?
The S&P 500 is trading really close to the 3,000 level, which is a an important reference level. It is in the human nature that this big round number is really attractive.
The S&P 500 recorded new highs on several occasions in the last few months but every time it rolled back.
The point is that without any significant growth in earnings, it is hard to seriously expect a meaningful break.
The Bigger Picture
What is the value of those estimates?
Wall Street forecast are always short-sighted, from quarter to quarter. Even Although there is an increasing consensus on the decline in Q2 earnings, there is also an expectation of rebound in Q3 and Q4, and growth expectations for the 2020.
You you stop for a moment you realize that this kind of forecast can be good for any year of your choice, very general and very short-term oriented.
The truth is that the state of the economy is a big question mark.
Lingering geopolitical tensions and future monetary policy uncertainty make the future hardly predictable, which results in estimates that are really feeble.
If you add other elements, like the use of debt to stimulate growth and the overall fragility of the economy, the real big uncertainty for everybody becomes the lack of visibility into future economic growth.
This article is for informational purposes only, it should not be considered financial advice.You can read the full disclaimer here.