Earnings season begins on Friday when JPMorgan Chase & Co. reports first quarter results.
In December, analysts expected profits to increase by 3.9% in the first quarter. Now those estimates have fallen dramatically, and analysts expect the companies of the S&P500 overall to post lower earnings, down 2.5% from this time last year.
The earnings dip comes after a dramatic increase in profits because of last year’s tax reform. But now those gains are baked in, and companies are comparing their earnings to very strong quarters in 2018.
The big question is, what happens from here?
While earnings are expected to fall 2.5% year-over-year in the first quarter and register tepid growth in the second and third quarters, according to Refinitiv, consensus estimates have them rebounding in the fourth quarter, rising 8.9%.
Especially worrying for investors is the potential of a corporate earnings recession, defined as at least two quarters of falling year-over-year profits, in 2019. First-quarter earnings are already projected to fall from 2018 figures, and further downward revisions to second-quarter estimates, currently at 2.5% year-over-year growth, could put them in negative territory as well.
Emily Roland, head of capital markets research at John Hancock Investments in Boston, noted:
Almost all the earnings growth is backloaded into the end of the year,” said . “We’re going to need a positive surprise in earnings to keep the engine running for strong market returns.
It’s common for analysts to dramatically lower their earnings estimates, and then the markets react favorably when companies beat the lower numbers. But this year has complications that could make that difficult; notably the trade wars.
With the U.S. still fighting trade and tariff battles with its three top trade partners, China, the EU, and Canada, U.S. companies could see earnings fall more than expected.
But there is a bright spot: With the Fed putting further interest rate hikes on hold, businesses could be more enthusiastic about investing and spending, which could drive earnings higher this year.
Either way, with the S&P 500 within a few percentage points of its all-time high and earnings potentially on the ropes, this is a risky time for investors.