Earnings season is invariably fraught with anxiety for investors. But this year the narrative about pandemic earnings recession is even more powerful. With no tax cut legislation to boost companies’ earnings, as was the case in 2018, they are expected to do worse by comparison to almost all quarters of this year.
Global Reasons for Downward Revisions
Yet were companies’ earnings dwarfed only by their profits made during the luckier year, analysts would probably sleep sounder now. Unfortunately, there are additional and more valid reasons for companies to reap lesser rewards in 2019. Economic growth in the US and other major global economic regions has slowed down and can be most generously characterized as only moderate.
The prolonged trade war between the two largest economies and tariffs piled up by both sides are also taking a toll on companies’ performance and analysts’ evaluations of their earnings. The weakness of big multinational companies, whose earnings are predicted to drop by 9.3% in Q2, dampens everyone’s confidence in the prosperous economic future even further.
The picture drawn by specialists is truly gloomy, firmly planting most of the companies’ earnings in negative territory. Across all sectors – electronics, semiconductors, telecommunication, construction, and technology – companies are anticipated to slide on average 2.6-3.1% in the second quarter and sink 0.3-0.8% in the third. It is only in the fourth quarter that a ray of light is supposed to pierce the gloom and bring companies’ earnings higher by 5.0-6.7%.
Affected by economic and geopolitical uncertainties and analysts’ pessimistic expectations, companies have frantically begun to cut their profit forecasts for the second quarter. Only two weeks before earnings season, almost 82% of the companies have slashed their profit estimates. Although presenting more modest forecasts ahead of earnings reports is a common practice used to place companies’ achievements in a more favorable light post factum, the willingness with which they make downward revisions this year is unprecedented.
Pandemic Cuts of Earnings Forecasts
Last time so many companies downgraded their profit expectations was in the third quarter of 2018, right before stocks tumbled 20%. An equally negative outlook on their future profit companies expressed only in 2015, when markets were mostly in decline throughout the world.
What is noteworthy about general pessimism this time is that it has overtaken not only struggling companies but also those who should feel secure about their earnings. Yet markets’ low spirits appear so pervasive that even such stable companies as Apple, Intel, and Boeing are trying to curb their excitement about their future profits. Analysts agree and often express only cautionary views on these companies’ achievements in the two next quarters of the year.
Although Apple (AAPL: NASDAQ) finishes mostly in the green in all recent trading sessions, analysts advise investors to put buying of its shares on hold. Half of thirty-eight analysts discourage investors from making a purchase of Apple stocks at the moment. The main reason for their cautiousness stems from their negative attitude towards Apple’s payment platform that has been progressing slowly since 2014.
Yet, as analysts think, the future performance of Apple stocks is inseparably connected to its ability to integrate its new services with its payment platform. If Facebook’s Libra takes the world by storm, Apple Pay can be outshined and ousted by it to the periphery of the payments industry. Made unpopular, Apple’s payment platform will surely negatively influence people’s sentiments towards its stocks.
But even in the unlikely event of Libra’s failure to capture people’s hearts, Apple can be outperformed by Amazon Pay that, thanks to its substantial investments in India ($450 million), is gaining popularity not only in the West but also in Asia. If Amazon continues investing equally vigorously in the US and other regions, Apple’s payment platform will fall out of favor with people and bring its stocks down.
Even Apple’s recent improvements of its payment platform did not convince all investors that its stocks should be bought right now. Thus, Goldman Sachs analyst Rod Hall maintains a neutral rating on AAPL, criticizing the company for not “offer[ing] any insights into App Store sales.”
Other analysts advising investors to wait are more concerned with Jony Ive’s departure from the company, deemed to influence Apple’s stocks even more negatively than its failing payment platform. Referring to Apple’s former chief design officer as “one of the most important people at AAPL, second only to CEO Tim Cook, Deutsche Bank analyst Jeriel Ong suggested to investors to refrain from buying the company’s shares till better times.
Boeing’s situation ahead of the second quarter earnings results are even more complicated than Apple’s. The company has been threatened by tariffs on all fronts, simultaneously attacked by China and the European Union. Indeed, the influence that the prolonged trade war between the two largest empires has on Boeing (BA) is perhaps more damaging than that exerted on other companies.
The imposition of additional tariffs from China, the most important export market, significantly restricts Boeing’s orders, considering that it is the largest American exporter. Transporting less goods will make the financial situation of the company even more shaky than it has been since its involvement in the long-running subsidiary dispute with the Aircraft. As estimated by the USTR, the EU subsidiaries to Aircraft have caused approximately $11 billion in economic harm to the US. Any new retaliatory tariffs might bring the troubled Boeing to the verge of financial crisis.
With the grounded 737 Max aircraft added to Boeing’s misfortunes, it is little wonder that it has reduced its projections for the upcoming quarter. It is even less wonder that many analysts also express skepticism about Boeing’s earnings in 2019.
Canaccord analyst Kenneth Herbert maintains that the problem with 737 Max goes beyond a simple software fix and is going to impact Boeing more negatively than its suppliers. Having lowered his price target on Boeing shares to $380, Herbert advises investors to forbear from buying its shares for the time being.
David Strauss, a leading analyst at Barclays, followed suit and downgraded his rating on the company’s stocks. "Our forecast reflects that MAX deliveries resume in Q4 with Boeing accumulating ~300 aircraft in storage while production only gradually increases beyond this to (57 per month) by early 2021," Strauss wrote. "We think the production rate recovery will be slower to come through than anticipated as we believe the airlines are unlikely to take aircraft as quickly as prior to the grounding."
The majority of analysts consider that now are not the best times to buy Intel’s shares either. Out of thirty-seven analysts expressing their opinion on Intel’s earnings in the second and the third quarter, only nine recommend buying its stocks. Others advise people to hold their horses.
Although it has consistently been finishing trading sessions in positive territory for the last several weeks, Intel (INTC) did not make a success story of its endeavors in the first quarter. The company lost over 23% of its value, which amounts to $45 billion taken off its market cap. Intel also lacks about $3 billion in cash, down from $15 billion at the end of 2015. Its long-term debt is over $25 billion.
Looking at these unsatisfactory numbers, it is not surprising that advisors do not have great expectations concerning Intel’s earnings in the second and the third quarter of the year. Nick Dempsey from Barclays maintains a hold rating on Intel, and so does Goldman Sachs analyst Brett Feldman. Their pessimistic outlook on the company chimes in with the opinion of many specialists who fear that Intel might eventually earn itself a place on the list of the companies with failed careers.
The second quarter of earnings results is only several weeks away. The mood of the companies poised to reveal their profits is not upbeat, judging by their hasty downward revisions of their earnings. But just as final reports usually look better than expected, this quarter might not be an exception and bring more cheerful news when companies’ profits are published.