The potential currency war is adding to earnings problems.
The realization that the trade war may expand from tariff wars to encompass currency wars is causing some consternation among analysts and strategists who are increasingly confused and uncertain on how to determine 2019 and 2020 earnings estimates. On Tuesday evening, Citigroup said the overhang of a sluggish economy, trade war threats and potential currency devaluations was enough to make its analysts lower earnings estimates for the S&P 500 for 2019 and 2020 by a little more than 2%.
Last week, Goldman Sachs lowered its 2019 and 2020 numbers, citing lower economic growth, lower oil prices, and weaker margins. “We expect negative revisions to consensus 2020 EPS estimates in 2H 2019,” Goldman analysts said, though they did keep their price target.
Of course, analysts have long been concerned with the impact of tariffs on earnings. Nick Raich, who covers corporate earnings at the Earnings Scout, notes that estimates have ebbed and flowed with tariff headlines: “In May, when the trade war escalated, earnings estimates dropped, and then in June when the psychology got better they improved,” he told me. “They started weakening again last week when Trump tweeted about more tariff wars.”
Raich noted it was likely earnings will come down again if concerns about a currency war — a new wrinkle in the trade war— get louder. The Trump administration’s declaration that China is a currency manipulator may be setting the stage for a deeper round of competitive currency devaluations.
This creates a problem for analysts: “You cannot adjust earnings estimates every time you have a new [Trump] tweet, or you will be really annoying your clients,” he said.
But that is what Wall Street is facing. Mike O’Rourke, Chief Market Strategist for Jones Trading, noted that even Apple was giving analysts a tough time. “Apple had positive guidance,” he said, “but it’s hard to have confidence because they are so exposed to China. There’s just not a lot of visibility, and I don’t have the expectation that there will be a lot more visibility.”
He believes that there is a good chance that the “flattish” earnings estimated for the S&P 500 in 2019 will go negative: “My view is that China is trying to run out the clock on Trump, and he seems to be willing to go along with that.” He believes the market will re-rate and the S&P 500 will likely be lower at the end of the year.
The larger fear is the trade wars will persist and force companies to re-evaluate their corporate expenditure plans. David Aurelio, who covers corporate earnings for Refinitiv, notes that year-over-year capital expenditures have fallen steadily this year, from an increase of 11.8% in the fourth quarter of last year:
S&P 500 Capital Expenditures 2019
Q1: up 4.8%
Q2: up 3.1%
Q3: up 2.4%
Q4: up 1.8%
What’s the lower capital expenditures mean? “It means that businesses don’t have confidence,” O’Rourke said. “Once you have these global trade agreements come we have come to count on for decades fall apart, it creates tremendous uncertainty.”
He doesn’t expect the capital expenditure numbers to improve much. “You can quickly cancel buybacks, or cancel dividends. But if you start construction on a plant or a store, you may get stuck.”