- Negative earnings projections outweigh positive
- Corporate tax cuts benefit fall
- IMF reduces outlook for the second time in three months
For the first time in three years, there is the prospect of an earnings recession risk as the S&P 500 profits for this quarter are likely to shrink.
Negative earnings projections outweigh the positive ones, even though I/E/B/S Refinitiv data suggests that profits are expected to grow by 16.8% year on year. That is stronger than expected for the two-thirds of S&P 500 companies who will be reporting, and it is more than 1% point higher than forecast.
The roll-off from the impact of corporate tax cuts worth $1.5 trillion means that first-quarter earnings are expected to fall by 0.3% in the first decrease since 2016’s second quarter.
Bank of America Merrill Lynch noted in a recent client report: “The proportion of beats is in line with history and less stellar than in recent quarters, while forward-looking earnings guidance has also come down.”
“As a result, 2019 consensus EPS growth expectations have fallen from 7% at the start of January to in line with our forecast of 5% today, suggesting estimate cuts may slow from here,” the report added.
The negative earnings outlook and weaker global growth forecasts are being offset slightly for investors by the U.S. Federal Reserve stressing its “patience” on future rate hikes. However, in January, the International Monetary Fund (IMF) reduced its global economic growth forecast for the second time in three months. Trade tensions between Washington, Brussels and Beijing were cited, along with a slowdown in activity across Europe.
European earnings are at a much lower base level than their U.S. counterparts but are expected to improve to an estimated 2.7% growth rate in the first quarter, up from 2.3% over the final quarter of 2018.