Let’s be blunt. The earnings guidance has been lousy in the last 24 hours, yet the stock market is taking it all in stride. What’s up?
This is the time of year when most companies roll out earnings guidance for the full year, and the overall trend has been the numbers moving lower.
In the last day, we have seen 2019 guidance reduced by Pfizer, 3M Co., Lockheed Martin, Whirlpool and Harley-Davidson. Some cited tariffs, some cited higher costs, some cited slower global growth.
It wasn’t all bad. A number of companies — Verizon, Rockwell Automation, Dover, Paccar and Xerox — all provided 2019 guidance that was inline or better than expectations.
But it looks like the markets sniffed out these lower earnings expectations when we had all that market turmoil in December.
With about a quarter of the way through earnings season (135 of the S&P 500 have reported so far), here are the earnings trends:
1. Fourth quarter: Fewer companies than usual are beating on the top and bottom lines. The earnings growth rate is also lower, from above 20 percent for the first three quarters (about 28 percent for Q3) to about 14 percent for the fourth quarter.
2. Full-year 2019: The trend is lower. Full-year growth estimates for the S&P 500 have been coming down since early October, when the outlook was for 10.2 percent growth, according to Refinitiv. At the beginning of January, the outlook had fallen to growth of 7.3 percent. Now it’s forecasting growth at 5.6 percent.
The battle is between those who believe that we will be entering an earnings recession (which means two consecutive quarters of negative earnings growth) in 2019, and those who think earnings will hold up in the low single digits.
So, if the news is so lousy, why are markets flat on Tuesday? There’s “Fed drift,” the well-documented tendency for U.S. stocks to rally in the 24 hours before a Fed meeting concludes, and there are also expectations that the Fed and other central banks will not be aggressive on interest rates.
In the past couple months, central banks around the world (U.S., Japan, China, European Central Bank) have signaled that they will not be raising rates aggressively, and there have even been hints that they would be very stimulative if they needed to be. China has already taken this path.
This change is critical to market sentiment. Traders believe that the two most important issues that determine the direction of stock prices are earnings and liquidity (how much money there is to invest), and the primary determinant of liquidity is central bank actions.
Then there are the trade talks. This is a real act of mental prestidigitation. The market believes that a deal can be reached despite the fiendish complexity (we are talking about far more than China buying U.S. soybeans). It’s even more complicated because there is a hope that the Huawei headlines can somehow be kept separate from the trade talk headlines.
The one thing the market cannot wish away is the global slowdown. It has been referenced by many firms. And other big companies, including Whirlpool, AK Steel, and 3M, have referenced higher costs eating into margins.
To really change market sentiment, what we need more than anything is a pickup in global activity.