US Earnings Update – February 2019
With investors pinning their hopes on a continuation of the strong earnings backdrop, we look at some of the figures posted so far and the subsequent market reaction.
According to Factset, around half of the companies in the S&P 500 have reported their final quarter earnings to date. Of those, approximately 70% have reported a positive surprise on earnings and 60% have beaten expectations on revenue numbers. Moreover, the blended earnings per share (EPS) growth rate for the S&P 500 is currently 12.4% - a figure that is in line with prior estimates but down somewhat from the 16% that was expected at the end of the third quarter.
Despite a meaningful deceleration in earnings growth from the stellar figures recorded in the previous three quarters, it would mark the fifth straight quarter of double-digit earnings growth for the index. Furthermore, the growth rate remains significantly above the long-term average (approximately 6-7%).
Caterpillar’s shares fell 9% in the aftermath of their disappointing earnings release. The company missed earnings expectations despite beating revenue forecasts. The equipment manufacturer, considered a bellwether for the strength of the global economy, pointed to tariffs and a subsequent slowdown in China as a major factor in its recent struggles. In addition, the company also blamed unfavourable currency impacts, steel prices and supply chain inefficiencies. Forward guidance for 2019 was also weak, with the company forecasting profit at the lower end of analysts’ expectations.
Another industry titan, Boeing, fared much better however. Its shares rose over 6% after the company beat earnings and revenue expectations comfortably. Annual revenues topped $100bn for the first time. Boeing also sounded a bullish note on its 2019 outlook. The company delivered a record 806 aircraft in 2018, however, the expectation is to smash that record again in 2019, with a delivery forecast of between 895 and 905 aircraft this year.
Of more concern is the earnings guidance issued for the first quarter of 2019. So far, only 9 S&P 500 companies have issued positive guidance and 33 have issued negative guidance. It remains to be seen whether this is the usual tactics employed by companies of playing down expectations in order to set the bar low for the year ahead or possibly a symptom of wider macroeconomic concerns starting to have a significant impact on corporate America. With uncertainty around trade/tariffs and the government shutdown, a sharp slowdown in capital expenditure is likely, posing further risks, especially in sectors such as industrials and tech.
The S&P 500 is now projected to report a year-on-year decline in earnings of 0.8% for the first quarter having been repeatedly slashed from a forecasted gain of around 7% at the end of the third quarter. During the month of January, EPS estimates fell by 4.1% for the first quarter. Whilst it is common to see EPS estimates decline, the decline for the first quarter is more pronounced than usual. Again, Factset has done some research and determined that the average decline in the EPS estimate during the first month of a quarter is 1.8% over the past 40 quarters/10 years. Should the index report an actual decline in earnings for the first quarter, it will mark the first year-on-year decline since Q2 2016. Notwithstanding a weak first quarter, consensus still expects the remaining quarters to produce earnings growth, leading to another full year of positive EPS growth. Therefore, an earnings recession is not anticipated as things stand.
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