Q4 earnings kickoff

A perspective from E*TRADE Securities 01/17/20

The first earnings season of 2020 is underway, hot on the heels of a record year for the stock market. And with the new year ushering in fresh records for the S&P 500® and a new milestone for the Dow, it seems bulls aren’t slowing down.

But despite new highs, earnings growth for companies in the S&P 500 declined in 2019, and if fourth-quarter earnings continue the trend, it would mark the longest losing streak in four years for the index.

Although the season has just started, and there will undoubtedly be surprises along the way, market observers will be watching closely to see if a longer-term earnings decline will set the tone for 2020, or whether a pickup is in sight—and what it may mean for investor portfolios.

On that note, let’s take a look at the scorecard.

Expectations vs. reality

According to FactSet®, Q4 2019 earnings are expected to decrease around 2% compared to Q4 2018. At the sector level, utilities and financials are expected to lead earnings growth, while energy, consumer discretionary, and materials are predicted to see the largest declines:

Q4 earnings sector expectations

Source: FactSet Research Systems, January 15, 2020

While such an earnings picture may seem somewhat bleak, it has a potential upside: It lowers the bar for companies to outperform expectations—and beating the Street’s expectations can sometimes trump year-over-year performance in terms of generating stock movement, especially in the short term. For example, Q3 2019 earnings were weak compared to 2018, but 75% of companies reported positive earnings surprises, and earnings were 3.9% above consensus estimates.1 The S&P 500 gained 8.5% in the last three months of 2019—an exceptionally strong end to a strong year. 

Are things looking up?

Some analysts are hopeful that earnings will rebound this year, forecasting projected growth of 4.6% and 6.7% for Q1 and Q2, respectively.2 The last period of contracting earnings may also support the case for near-term growth. Following three consecutive declines from Q4 2015 to Q2 2016, earnings growth picked up strongly in Q1 2017:

Year-over-year earnings growth per quarter

Source: FactSet Research Systems, January 15, 2020

However, one point of caution when comparing the 2016 earnings rebound to present day is the labor market. With historically low unemployment and higher wage growth than in 2016, increasing labor costs are likely to be more of an issue, and could contribute to more muted prospects for earnings growth.

Earnings season themes

So why have stock prices continued to rally in the face of an earnings contraction? Some observers suggest that the market is trading on expectations rather than absolute numbers. After three rate cuts late last year and a recent cooling of trade tensions with China, investors may be holding out hope that companies will start reaping the benefits of easier monetary policy and a relatively stable geopolitical climate.

Here are a few themes that have emerged so far:

  • Big bank numbers: Major banks were among the first to report, with beats from JPMorgan Chase, Citigroup, and Morgan Stanley, and misses from Wells Fargo and Goldman Sachs. Despite falling interest rates, JPMorgan and Citigroup reported double-digit growth, driven by a healthy US economy and a strong consumer, which could add to optimism about the strength of big business.
  • Foreign exposure: According to FactSet, foreign exchange has been cited on some earnings calls to date as a negative factor on Q4 earnings amid an increasingly strong US dollar.2 If this factor persists, domestically oriented companies may see more growth this quarter than those with higher international exposure.
  • Guidance: Many companies issue “forward guidance” during earnings reports, which can play a large role in expectations and, by extension, stock performance. Investors will want to look beyond the Q4 numbers and see whether guidance is positive or negative.

The current round of earnings won’t necessarily make or break the market. While wildly bad (or good) numbers may catch investors off guard, companies have been guiding expectations lower for a while now, and earnings are unlikely to deliver a decisive blow for the market as a whole.

Whatever the outcome, one quarter is only a fraction of the larger picture and investors should remain focused on a diversified portfolio aligned with their long-term goals.


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  1. FactSet Earnings Insight, November 22, 2019, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_112219.pdf
  2. FactSet Earnings Insight, January 10, 2020, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_011020.pdf

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