For Immediate Release
Chicago, IL – April 11, 2019 – Zacks Director of Research Sheraz Mian says, “The earnings decline in 2019 Q1 will be the first earnings decline since 2016 Q2. Driving the Q1 earnings decline are margin pressures across all major sectors even as revenues continue to grow.”
Q1 Earnings Season Getting Underway
Here are the key points:
- Total S&P 500 earnings are expected to decline -4.4% from the same period last year on +4.5% higher revenues and 100 basis points of compression in net margins. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with Technology and Energy as the biggest drags.
- The earnings decline in 2019 Q1 will be the first earnings decline since 2016 Q2. Driving the Q1 earnings decline are margin pressures across all major sectors even as revenues continue to grow.
- Tough comparisons to last year, when margins got a one-time boost from the tax legislation coupled with the rise in payroll, materials and transportation expenses are weighing on margins.
- The Finance sector, which dominates the early reporting cycle, is expected to have a lackluster showing in Q1, with total earnings for the sector expected to be up +0.2% on +6.4% higher revenues.
- Technology sector earnings are expected to decline -10% from the same period last year on +2.9% higher revenues, with the Semiconductor space as the biggest drag. Excluding the Tech sector’s weak growth in Q1, total earnings for the rest of the index would be down by -2.6% from the year-earlier period.
- Estimates for Q1 as well as full-year 2019 steadily came down over the last few months, with the magnitude of negative revisions one of the highest in recent years.
- The Earnings season has gotten underway, with results from 24 S&P 500 index members already out (fiscal quarters ending in February). Total earnings for these 24 companies are down -9.8% on +4.3% higher revenues, with 75% beating EPS estimates and 54.2% beating revenue estimates.
- For the small-cap S&P 600 index, total Q1 earnings are expected to be down -9.6% from the same period last year on +4.4% higher revenues.
- For full-year 2019, total earnings for the S&P 500 index are expected to be up +1.8% on +3.2% higher revenues, which would follow the +23.3% earnings growth on +9.3% higher revenues in 2018. Double-digit growth is expected to resume in 2020, with earnings expected to be up +11.2% that year.
- Estimates for 2019 have been steadily coming down, with the current +1.8% growth rate down from +9.8% in early October 2018.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 17.6X and index close, as of April 9th, is $163.26. Using the same methodology, the index ‘EPS’ works out to $181.57 for 2020 (P/E of 15.9X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
With earnings growth in the first two quarters of 2019 expected to be in negative territory, the ‘earnings recession’ term is liberally being thrown around. This is coming at a time when late-cycle worries have already made market participants overly sensitive to the shape of the Treasury yield curve and its cyclical implications.
The definition of ‘recession’ is two or more quarters of negative growth, typically GDP growth.
The recession talk reflects ground reality as earnings growth in the first two quarters of the year is on track to be negative. But we shouldn’t take this recession talk too seriously, however. The reason is that the negative growth in the first half of the year is solely because of very tough comparisons. In other words, the base period for 2019 Q1 growth is 2018 Q1, when earnings received a huge boost from the tax-cut legislation. You can see this in the expanded version of the previous chart that shows all four quarters of 2017 as well.
The lower corporate tax rates that showed up in earnings for the first time in 2018 Q1, the base year for 2019 Q1, boosted profitability through margin expansion. As such, we are up against some tough comparisons in 2019.
The tax cut legislation didn’t have a direct bearing on revenues last year and we are not seeing that much drop off in estimates for this year either, as the earlier chart above shows (orange bars). Importantly, growth is expected to resume in the second half of the year and accelerate into next year.
So, if the earnings recession is only ‘technical,’ is there nothing to worry about on the earnings front?
That’s not correct – there are legitimate reasons to be wary of the earnings picture. The earnings growth trajectory would be challenged and difficult even without the issue of the aforementioned tough comparisons as the global economic growth backdrop has become less favorable and cyclical rises in transportation, logistics, payroll and other expenses are squeezing margins. As a result, analysts steadily lowered their estimates for 2019 Q1 as well as full-year 2019.
The weak guidance from Nike NKE, FedEx FDX, Adobe ADBE, Oracle ORCL and others in this reporting cycle suggests that we will likely see a replay of what we experienced the last earnings season that pushed estimates lower. We will be keeping a close eye on how estimates for 2018 Q2 evolve as companies report Q1 results and share their outlook for Q2 and beyond.
The recent revisions trend shows that these low-growth expectations for the coming quarters still remain vulnerable to further downward revisions. In other words, it is reasonable for market participants to nurse some doubts about the current earnings backdrop.
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks Investment Research
800-767-3771 ext. 9339
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Adobe Systems Incorporated (ADBE) : Free Stock Analysis Report
Oracle Corporation (ORCL) : Free Stock Analysis Report
NIKE, Inc. (NKE) : Free Stock Analysis Report
FedEx Corporation (FDX) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research