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There could be virtually no earnings growth in Q1

Scott Gamm

The earnings picture is looking bleaker and bleaker for 2019.

Analysts surveyed by FactSet are expecting only 0.7% year-over-year earnings growth for the first quarter of 2019 for S&P 500 (^GSPC) companies.

“The problem is not revenues (expectations there are still +6%), but rather margins,” wrote Nick Colas, co-founder of DataTrek Research, in a note to clients. “While that’s an understandable trend this late in an economic cycle, negative earnings leverage is never an investment positive.”

The setup for second quarter earnings aren’t looking much better with the consensus estimate of 2.4% growth.

The dimmer growth rates come amid tougher comparables for 2019 vs. 2018 compared to 2018 vs. 2017 amid the corporate tax cuts that took effect in early 2018.

With earnings growth taking a backseat, some of the market’s other big worries need to subside in order for stocks to move higher, according to Colas.

“A bullish position on equities comes down to believing the Fed stands pat and US/China negotiations are done by May/June,” Colas added. “Both are logical assumptions, and both would support the belief that second half earnings growth will improve.”

Just on Monday morning, construction machinery maker Caterpillar (CAT) and gaming chip giant Nvidia (NVDA) each raised concerns about China-related macro factors impacting earnings.

That said, investors are still allowed to overreact to lackluster earnings growth, as they’ve done in the past, even if the Fed throws the markets a bone.

“Over the years we have learned that growth rates around zero (as first half earnings look to be) create nonlinear market responses,” Colas said. “And that’s exactly the setup we have in U.S. stocks just now.”

So far, the markets have been shrugging off the 2019 earnings picture, with the S&P 500 up 6.3% year-to-date.

Though that steep gain is reminiscent of the January 2018 stock market surge, which was followed by a 10% correction a few weeks later in February.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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