How dim Q1 earnings expectations could affect the market’s march to record highs
The earnings expectations keep getting dimmer.
First quarter earnings are now expected to decline 4.2% year-over-year for S&P 500 (^GSPC) companies, according to FactSet, compared to a 3.9% forecasted decline just one week ago.
This would be the first year-over-year quarterly drop since the second quarter of 2016 and a far cry from the roughly 25% growth rate S&P 500 companies clocked year-over-year for the first quarter of 2018.
The earnings boon a year ago was driven by the corporate tax cuts that took effect in early 2018. That stimulus is paving the way for tougher year-over-year comparables.
Still, earnings growth is traditionally one of the biggest drivers of stock prices. The market knows this, yet the S&P 500 is still trading near its 2019 highs and is up a staggering 15.2% since the start of the year. Even with the threat of negative earnings growth, the S&P 500 is only 1.5% away from hitting its all-time record high of 2,930, which was reached on Sept. 20, 2018.
“Markets are already looking to the quarter beyond,” said David Bahnsen, founder & chief investment officer of The Bahnsen Group and author of The Case for Dividend Growth. “Earnings for first quarter could very well be lower than a year ago, but the market is not likely to take that as anything other than transitory.”
Earnings growth is expected to stage a dramatic rebound from the first quarter slump. Here are FactSet’s estimates for the remainder of 2019:
Q2 2019: 0%
Q3 2019: 1.6%
Q4 2019: 8.2%
The 2019 full year expected growth rate for earnings is 3.6%.
Investors will get a first glance of how companies fared at the start of 2019 when the big banks kick off earnings reporting season later this week.
On Wednesday, Delta Air Lines (DAL) reports earnings. On Friday, JPMorgan Chase (JPM) and Wells Fargo (WFC) release earnings.
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Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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