- Quarterly earnings for the S&P 500 are expected to decline for the first time since the second quarter of 2016, even though the index is just 2% from its historic high.
- First-quarter earnings for the S&P 500 are projected to decline 2.5% from last year
- Stocks up with earnings down
- It indicates the market could be very sensitive to macro events like tariffs or slower global growth.
- Many industries that were under pressure in the fourth quarter have snapped back in 2019 on the "bottoming" story.
Stocks are rising even with lower earnings because of the focus on the future, not the past. The stock market is a discounting mechanism for a future stream of earnings.
The "bull narrative" is still dominant on Wall Street — that China and Europe are bottoming — and this will stabilize markets.
The markets have gone from pricing in negative growth in the first half to rapidly re-accelerating growth in the fourth quarter and the beginning of 2020."
Flat or declining earnings don't necessarily mean the stock market is in trouble.
- There is a good chance earnings for the first quarter will turn positive. Because guidance is usually conservative, most companies end up beating analyst estimates. On average, the earnings surprise for the S&P 500 is about 3 percentage points.
Earnings are now expected to be down 2.5%, so if the historical average holds and the final estimate is 3 percentage points higher, earnings will be slightly positive, up 0.5%.
- Declining earnings do not necessarily correlate with a decline in the stock market. There have been many times where earnings have been flat or declined and even when the market declined, it quickly bounced back (this happened in the first part of 2016). The reason: No recession followed.
Here are the Blue Chips reporting earning these week: