Morgan Stanley Says An ‘Earnings Recession’ Has Arrived (#GotBitcoin?)
The long-awaited earnings recession has finally arrived, but investors are still too optimistic and should anticipate more disappointment as the year drags on, according to Morgan Stanley. Morgan Stanley Says An ‘Earnings Recession’ Has Arrived (#GotBitcoin?)
* Morgan Stanley equity chief Mike Wilson, who first predicted a contraction in earnings growth in 2018, lowers his 2019 S&P 500 EPS target to 1 percent from 4.3 percent.
* “We are increasingly convinced that consensus earnings expectations for 2019 have further to fall,” Wilson writes in a note to clients.
* A host of market data researchers including FactSet and S&P predict a decline in S&P 500 earnings in the first quarter of 2019.
* Wilson was the most accurate Wall Street strategist tracked by CNBC in 2018 and has issued a streak of bearish calls about the S&P 500 and earnings performance.
Mike Wilson, the firm’s chief U.S. equity strategist, lowered his 2019 S&P 500 earnings per share growth expectation to 1 percent from 4.3 percent based on the many downward profit revisions during the fourth-quarter reporting season.
And while consensus numbers are already pricing in zero growth for the first half of this year, Wilson contended that predictions for a re-acceleration in the second half of 2019 are misplaced. He said the year could end with earnings down as much as 3.5 percent overall.
“We are increasingly convinced that consensus earnings expectations for 2019 have further to fall and that the optimistic uptick currently baked into fourth-quarter 2019 estimates is unlikely,” Wilson wrote Monday. “A modest further decline in earnings will deliver the earnings recession we called for. Equity returns can still be positive in this environment, but they will likely be weaker than they otherwise would have been.”
Wilson, who first predicted an earnings recession in 2018, now sees 2019 S&P 500 EPS at $164, below the consensus estimate of $170.
The strategist added that when investors have assumed a jump in earnings growth four quarters out in the past, the numbers for all four quarters ahead tend to fall but the growth quarter tends to fall the most. In fact, if current estimates move in line with history, investors could see a full-year decline of 3.5 percent in S&P earnings, he wrote.
About 66 percent of the S&P 500 has reported fourth-quarter 2018 earnings thus far. While nearly 70 percent have topped analyst expectations on the bottom line, only 60 percent have surprised to the upside on revenue. Looking ahead, Refinitiv joined other market data researchers FactSet and S&P last week in predicting a decline in S&P 500 earnings in the first quarter of 2019.
FactSet predicted a first-quarter earnings loss of 2.1 percent as of Monday morning.
“Downward revisions have come even faster and steeper than we expected and the [consensus] full year earnings growth number now sits just above 5 percent with a material upward acceleration projected in the fourth quarter,” Wilson told clients. “At the start of a downward revisions cycle, history tells us not to count on that kind of upward inflection.”
Wilson was the most accurate Wall Street strategist tracked by CNBC in 2018 and has issued a streak of bearish calls about the S&P 500 and earnings performance over the past year. He did not adjust his current 2019 S&P 500 year-end price target of 2,750.
That estimate is the lowest of 2019 and implies less than 2 percent upside from Friday’s close. Wilson has repeatedly warned of dismal results in equities and said investors could be caught in a “rolling bear market” for the next several years with the S&P 500 trading in a range of 2,400 to 3,000.
Better-Than-Expected Earnings Ease Growth Fears—for Now
Corporate profits haven’t waned as much as analysts had predicted.
Investors are breathing sighs of relief that corporate profits haven’t waned as much as feared, giving new life to a stock-market rally that had largely stalled since the summer.
Although earnings are on track to decline for the third consecutive quarter, about 75% of the 342 companies in the S&P 500 that have posted results through Thursday morning have beaten expectations, according to FactSet. That is slightly above the five-year average of 72%. Dozens of companies report through the end of the week.
While overall profits are expected to fall about 2.7% from a year earlier, the steepest decline since 2016, most analysts have called a bottom. They project earnings growth to accelerate next year, helping to allay fears of a potential recession.
“Earnings…are truly better than expected,” said Peter Vanderlee, a portfolio manager at ClearBridge Investments who helps oversee $22 billion in assets. “As a result, there hasn’t been a moment where you would say, ‘Look, it is upon us. A recession is nearing.’”
Companies including Intel Corp. , Johnson & Johnson and United Technologies Corp. raised their outlooks for the year after posting strong financial results. Intel logged record quarterly revenue, easing concerns about softening demand for its products. Johnson & Johnson said sales of such consumer products as Band-Aid bandages and Tylenol grew, while United Technologies said it expects sales to keep rising.
Some investors caution that expectations for 2020 are too high. Earnings are expected to rise 5.7% and 7.1% for the first and second quarters, respectively, FactSet data show, following a roughly flat performance in the last three months of this year.
And more companies have been lowering earnings forecasts than raising them. Thirty-nine companies in the S&P 500 have issued negative outlooks, compared with 15 giving positive guidance, according to FactSet.
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“Essentially all of us came into the earnings season with very low expectations,” said Supriya Menon, senior multiasset strategist at Pictet Asset Management. “The problem is that earnings expectations are still too high next year.”
It isn’t unusual for companies to beat earnings expectations because the bar can be low to begin with, as companies manage expectations. The latest results helped push the S&P 500 to a fresh record this week for the first time in three months. The index, which is up 21.5% in 2019, had faced resistance breaking out of a narrow trading range in recent weeks. It has climbed 2.4% in October.
Mr. Vanderlee said he has been impressed by results from such big banks as JPMorgan Chase & Co., which posted strong growth and highlighted the strength of the U.S. consumer, a key engine of growth. He said he expects corporate earnings to expand next year.
“The fears of a recession have been high for the past six to nine months,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. “Earnings have certainly helped put some of that to rest.”
Also helping ease concerns about the economy, data on Wednesday showed gross domestic product rose at an annual rate of 1.9% from July through September, a slowdown from the second quarter but above the expectations of economists surveyed by The Wall Street Journal.
Investors will get another glimpse of the health of the domestic economy when the monthly jobs report is released Friday. The latest figures showed unemployment hovering at a 50-year low.
Still, there are signs that a stronger U.S. dollar, waning economic growth around the world and the U.S.-China trade dispute have been weighing on companies, especially those more reliant on overseas business.
For some, the latest earnings season has highlighted the strength of the U.S. economy relative to others around the world, especially with the continuing trade battle between the U.S. and China. Though tensions have eased lately, the countries haven’t reached a final pact, and many investors fear that relations could sour in coming months. These concerns came to the forefront Thursday, weighing on U.S. markets in early trading.
“The companies that are more domestically focused are doing quite well,” said Hans Olsen, chief investment officer at Fiduciary Trust Co., which oversees $7 billion in assets under management. “The ones overseas are really struggling…There’s a notable lack of robust growth around the world.”
S&P 500 companies deriving a bigger share of revenues from the U.S., rather than abroad, have fared betterthis earnings season.
Companies in the S&P 500 with relatively high international exposure are poised to underperform those that derive a bigger chunk of revenue domestically. Those that get less than 50% of revenue from the U.S. are on track for an 8.6% earnings decline and a 2.4% fall in revenue, FactSet data show, compared with a more modest 0.3% earnings decline and 4.9% jump in revenue for those that generate more than half of their revenue in the U.S.
Ford Motor Co. and Caterpillar Inc. have been among the companies that have pointed to international headwinds. Ford’s quarterly results beat estimates, but executives said weakness in China will crimp earnings, dimming its outlook for the year. Caterpillar executives said that global economic uncertainty is weighing on profits.
“We’re clearly not satisfied with our standing in China, and the team is working exhaustively to return to profitable growth in this important market,” Ford Chief Executive James Hackett said on the company’s latest earnings call on Oct. 23.
In contrast, Microsoft Corp. , which gets more than half its revenue from within the U.S., according to FactSet, recorded per-share earnings and revenue that beat analysts’ expectations thanks to strength in its cloud-computing business. Its shares set a record Wednesday.
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