Wall Street has significantly scaled back earnings expectations for US companies for the final three months of 2019, putting the S&P 500 on track for its slowest annual pace of earnings growth in four years.
With nearly four-fifths of America’s largest companies now having reported their third-quarter figures and updated investors on the outlook, earnings are forecast to rise just 0.8 per cent in the final three months of the year. That is down from a forecast of 4.1 per cent at the start of October, according to Refinitiv, and a far cry from the 7.2 per cent expected as recently as July.
A shallower-than-expected decline in third-quarter earnings has helped shares grind their way to record highs in recent days, despite the prolonged global trade war and the uncertain direction of US interest rates.
The diminished outlook, however, on top of new forecasts that US gross domestic product growth could slip to 1 per cent or less in the fourth quarter, raises questions about the durability of the equity market rally.
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“What we’re likely to see this quarter and next is the continuation of the anaemic earnings we’ve seen throughout 2019,” said Patrick Palfrey, senior equity strategist at Credit Suisse. “There are a couple of idiosyncratic items weighing on that. One is pressure on tech margins, the second is the year over year decline in oil.”
The fourth-quarter estimate for S&P 500 earnings represents only a modest rebound from the three months ended September where, with 383 companies having reported as of November 5, earnings are now estimated to have contracted 0.7 per cent. Excluding the energy sector, earnings growth was likely to be 1.9 per cent.
Refinitiv now forecasts S&P 500 earnings growth for 2019 as a whole at 1.3 per cent, the slowest rate since it rose 0.2 per cent in 2015.
“As this reporting season starts to wind down, we find we’ve gotten more worried about a continuation of fundamental purgatory in the US equity market, in which investors continue to debate the timing and cause of the end of the cycle with no end in sight,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets.
