AMERICA's biggest public companies are warning that their earnings may not be as strong as they hoped this year, intensifying pressure on a bull market that has struggled to regain its footing.
Firms in the S&P 500 were projected back in September to report fourth-quarter earnings growth of 17% from the year earlier. But dimmer expectations for global growth and disappointing holiday sales have forced many companies to slash their forecasts, pushing the estimated earnings-growth rate for the quarter closer to 11%, according to FactSet.
The drop-off in estimates—the steepest since 2017—is the latest sign that U.S. corporations, from retailers and airlines to phone makers, are losing momentum after several quarters of standout growth.
The wobbling stock market reflects anxieties about how swiftly firms have been lowering their forecasts. Stocks slid in early January after Apple Inc. cut its quarterly revenue forecast for the first time in more than 15 years, citing an unexpected slump in iPhone sales in China. Macy’s Inc. shares suffered their worst one-day selloff ever on Thursday after the retailer lowered its guidance for the year. And airline shares fell after Delta Air Lines Inc. cut its fourth-quarter forecast, citing a weaker-than-expected holiday season.
The string of downbeat forecasts puts the stock market in a precarious position heading into a week when banks including Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are scheduled to report quarterly results. The S&P 500 is up 3.6% for the year but still 11% below its all-time high after a steep selloff in the final months of 2018.
For many investors, the coming earnings season will be a test not just of how profitable companies were in the fourth quarter but also of executives’ optimism about the future. The results will also indicate how well U.S. companies are holding up as economies across emerging markets and the eurozone show signs of faltering.
“These days, people are interpreting everything as the glass being half empty,” said Matthew Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. The firm has generally been focusing on shifting money into higher-quality credit, he said, as well as encouraging advisers to increase allocations to so-called defensive sectors, areas of the stock market that tend to hold up during spurts of volatility. “That’s part of the challenge as we look forward.”
Some analysts attribute much of the unusually steep drop-off in earnings estimates to Apple’s cuts. The company ranks among the five biggest publicly traded firms in the world, meaning changes to its earnings estimates can disproportionately impact overall estimates.
Excluding Apple, as well as energy firms that have trimmed estimates due to falling oil prices, “we’re back to something that’s more or less on trend,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse .
Analysts also point out that, even with earnings growth expected to decelerate in the fourth quarter from the third, companies look poised to post healthy profits anyway. If S&P 500 firms grow earnings by the estimated 11%, it would mark their fifth straight quarter of double-digit earnings growth.
Yet that hasn’t stopped investors from worrying.
Over the past year, corporate earnings haven’t been the balm that many had hoped for the markets. S&P 500 firms grew their profits in the third quarter of 2018 at the fastest rate yet that year. Stocks and bonds slumped anyway, with the S&P 500 ending the year with its worst annual return since 2008.
Some investors have ascribed the fading power of earnings to unease over the fact that profit growth appears to have peaked for the remainder of the bull market. From the fourth quarter onward, investors are largely expecting a deceleration.
Even though the U.S. economy is “still running at a decent clip,” the volatility hitting markets shows many investors are fixated on the “sharp deterioration in growth expectations,” Mr. Forester said.
That makes commentary from company officials particularly important to analysts and investors this year.
In his Jan. 2 letter to investors, Apple Chief Executive Tim Cook said most of the company’s expected revenue shortfall stemmed from weaker-than-expected sales in China, which he partly blamed on the country’s trade fight with the U.S.
Other companies affected by global trade tensions could echo Apple’s warning in coming weeks. Caterpillar Inc. and 3M Co. shares slid following their third-quarter earnings reports in which both companies said U.S. tariffs on foreign steel and aluminum were increasing their costs.
“The commentary that we’re going to get on China and trade is going to be potentially pretty bad,” Mr. Golub said. He added that it was difficult to tell whether strong numbers would ultimately have a bigger effect than “sloppy commentary” on the markets.
Few believe earnings are about to contract. Analysts are projecting S&P 500 companies will post earnings growth in the low single-digit range in the first three quarters of 2019 before climbing to 12% in the fourth quarter, according to FactSet.
That could be enough to entice buyers back into the market, especially with stock valuations looking relatively low. The S&P 500 trades at about 15.1 times its projected next 12 months’ of earnings, below the five-year average of 16.4 and above the 10-year average of 14.6, according to FactSet.
“Peak growth is not the same thing as contraction, and I think investors will coalesce around that idea perhaps soon,” said Michael Arone, chief investment strategist at State Street Global Advisors, which has been recommending investing in companies with high profit margins and healthy balance sheets as economic growth slows.
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