Earnings Season – The Sugar Rush Fades

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Corporate earnings were on a sugar rush over the last year thanks to a large slice of corporate tax cuts with thick icing from synchronized global growth. In the 1st quarter of 2018, S&P revenues were up 8.2% and earnings up a staggering 22.5%! That’s a big piece of cake! If we look ahead to the 1st quarter of 2019 the sugar rush fades, as analysts are expecting revenue to rise 5.5% and earnings only 3.1%.

This week kicks off the 4th quarter 2018 earnings season. Analysts are expecting a good quarter, with revenue up 9.2% and earnings up 16.0%, but the real story will be management’s comments and forecasts for the remainder for 2019. Coming down from the sugar rush may not be pretty.

No party lasts forever, and concerns are coming from both the top down and bottom up. From the top down it is no surprise economic growth is slowing around the world. We see noticeably slower GDP growth in China and Europe, and just recently we are seeing indications of slower growth in the U.S. In response to this data, we see the U.S. Federal Reserve tilting toward a patient approach regarding future rate increases, and it would not be surprising to see China offer some stimulus.

From the bottom up we are seeing negative earnings revisions and more cautionary comments from many companies including FedEx, Apple, Macy’s, American Airlines, BlackRock and Jaguar Land Rover. We are even seeing some layoff announcements: Sears’ bankruptcy, with the potential layoff of 50,000 retail workers, is not encouraging. But not all the news is negative, as this week General Motors took up guidance for 2019.

The let down from a sugar rush should surprise no one, and our portfolios are conservatively positioned in corporate risk to ride out this slowdown. But since the news is full of surprises these days, we will remain ready to take advantage if another serving of cake is offered, although we all know too much sugar is not good for you!

Sources: Bloomberg, the Wall Street Journal, the Financial Times