As many financial analysts expected, part way through the fourth quarter 2018 earnings season the reports have reflected mixed results. Some industries, such as financials, have reported fairly solid earnings compared to analyst’s expectations while others such as industrial companies have missed earnings expectations.
Corporate earnings are still expected to reflect strong year-over-year growth largely due to the decrease in corporate tax rates in 2018. However, earnings growth as a whole is coming in below expectations as organic growth has been waning. This caused analysts to cut their earnings expectations for 2018 as well as 2019.
The above chart shows that earnings expectations were higher at the beginning of 2018 than the beginning of 2019. This is the result of earnings estimates decreasing as companies reported lower than expected earnings in 2018 and provided weaker guidance for 2019. Many companies have cited the trade war, geopolitical uncertainty, and weaker than expected holiday spending as headwinds that are likely to reduce their reported earnings and may continue into 2019.
Responding to weaker earnings guidance from a number of large multinational corporations, analysts have decreased their earnings expectations by an average of 10% for the fourth quarter of 2018 and all of 2019.
The decrease in earnings expectations may have three possible implications. The first is that earnings may be in-line with expectations, in which case investors may continue to fret about slowing corporate earnings and the stock valuations that are based on those earnings.
On the other hand, lower earnings expectations may represent a lower bar which could result in more companies beating their earnings expectations. This could lead to some companies being rewarded for strong results while others are punished if they cannot beat the new lowered expectations.
Finally, additional weak earnings guidance could force analysts to go back to the drawing board once again to lower earnings estimates even further. This would likely increase recession fears as it could be an early sign that global economic activity is waning leading to reduced corporate revenues and profits.