Market Rebound Could Clash with Weakened Earnings
The bull market is causing investors to get into a complacent mood, warn analysts, since profits are likely to fall and earnings are weakened.
In stock trading or investing, you need a clear vision of the future in order to make the right decisions in the present. For that, it is important to get multiple analysts’ views because otherwise you could get a perspective that isn’t probably true. Sometimes, what investors generally think may not be the right view for the future. You need to look beyond the immediate circumstances.
The Likelihood of Profits Falling
Analysts are of the opinion that 2019 profits are likely to fall though stocks have made a comeback in 2019 after a poor 2018 Q4. The profit outlook is still gloomy, which could indicate that the gains that have been made can’t quite be sustained. According to analysts’ latest consensus estimates as reported by the Wall Street Journal, there could be a 1.4% drop in the earnings of the S&P 500 for 2019’s first quarter, with a decline in 7 out of 11 S&P sectors.
Another seasoned analyst Doug Kass has warned that the market is in a complacent mood as is typical in a bull market, and is thereby separating itself from the reality. And what a bull market it has been, with Marketwatch’s Barbara Kollmeyer reporting this year’s start to be the best “since 1987”. Kass believes that a diminished outlook for 2019-2020 in terms of profit and economic growth is being ignored by investors.
What the Gloomy Estimates Tell
To take a close look at the gloomy estimates, profit estimate in the 2019 first quarter for S&P 500 companies is 1.4% today but was +7% in September 2018. Over 30 S&P companies, including Netflix ($NFLX), Estee Lauder ($EL) and Delta Air Lines ($DAL) have forecast 2019 Q1 profits that are below estimates. According to Investopedia, it is a briskly deteriorating situation since it quotes CNBC reporting that the year-over-year (YOY) profit decline consensus is 0.8%. Out of the 11 S&P sectors, 6 were estimated to be in red. Profit estimates are expected to go even lower since, according to Doug Kass, the economic growth seen globally is quite fragile and is starting to deteriorate. This has further aggravated his concerns of investors being complacent and quite removed from reality.
More Volatility Potentially on the Way
What investors now need to be prepared for is, according to Jeremy Zirin of UBS Wealth Management Americas, greater volatility levels than the past few years since there is the risk of greater market upheaval. Zirin’s logic is that the slowdown seen now is during the 10th year of a period of economic recovery, as a result of which there is the fear that each slowdown we find could end up being the end of a cycle.
Investors will be seeing a strange situation where the market rebound and the opposing trend of weakening earnings come together. Global economic growth is slowing and that is starting to influence corporate earnings. According to Investopedia’s Mark Kolakowski, the recent dovish approach of the Federal Reserve to slow down on interest rates isn’t likely to affect this tide significantly. So there could be strong negative forces for the stock market to overcome.
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