National Post (National Edition)
MARKET ANGST EXTENDS BEYOND APPLE,
46 per cent of U.S. companies have lowered outlooks
Apple Inc.’s first estimate reduction in two decades helped ignite a 660-point rout in the Dow Jones Industrial Average. Bad news for investors: thei phone maker is hardly the only company paring a forecast.
Among U.S. companies issuing estimates for the fourth quarter ,46 per cent have revised the outlook lower, the most since President Donald Trump’s inauguration. With White House economic adviser Kevin Hassett predicting more downgrades to come, it’s drumming up angst for investors who hoped December’s volatility would clear up in the new year.
While evidence of an earnings-season disaster remains scant, weakening guidance is the last thing Wall Street wants to hear as investors search for tangible signs that a trade war and tightening Federal Reserve are biting the bottom line. Expectations that earnings will rise by 8 per cent in 2019 is a pillar in bull cases that have been decimated in one of the most volatile stretches for stocks since 2008.
“We’ve seen earnings growth for the fourth quarter get cut across every sector,” said Jerry Braakman, chief investment officer at First American Trust. “That’s why the market has moved down in December. And today is another challenging day.”
Signs are multiplying that traderelated spillovers are impacting economies around the world. A gauge of U.S. manufacturing plunged by the most since 2008 just a day after Apple cut its sales outlook, fuelling investor concerns that global growth is cooling. The combination sent the S&P 500 spiralling lower by 2.5 per cent and the Nasdaq 100 tumbling 3.4 per cent, led by the worst slide for Apple since January 2013.
The executive branch weighed in, with Hassett, the chairman of the White House Council of Economic Advisers, saying the ongoing tariff war with China may still force many U.S. companies to cut earnings projections until the two countries work out a deal.
“It’s not going to be just Apple,” Hassett said in an interview on CNN. “There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.”
Delta Air Lines reduced its revenue forecast Thursday, the second time in two months, after disappointing ticket pricing. Considering the slowdown came over the holiday season, the timing calls into question just how healthy the consumer really is. Pair that with Apple’s weakened forecast and earlier warnings from Fedex and Micron, and the outlook is getting shaky.
“If you think about what’s been the primary theme we’ve heard over the last six months, particularly, yes things might be slowing, but the consumer is really healthy,” said Joe “JJ” Kinahan, chief market strategist at TD Ameritrade. “There are very few more consumer driven products than Apple. If they’re experiencing a slowdown, what does that actually truly mean for the consumer overall?”
Heading into the fourth quarter reporting season, every S&P 500 sector except materials and industrial companies have seen meaningful declines in earnings-per-share expectations, according to Bloomberg Intelligence. As they stand, profit forecasts for the S&P 500 on average have fallen 1.5 percentage points since the start of December. Revenue estimates have declined 0.2 per cent over the same period.
As a result, profit margins remain a central concern. Take Facebook. Analysts are expecting the social media giant to post zero per cent earnings growth from last year through 2019. Meanwhile, revenue is expected to rise to $68 billion in 2018, up nearly 23 per cent.
A dimmer outlook for tech giants is taking hold. Google parent Alphabet Inc. is expected to post earnings growth that’s less than that of the broader market this year — 5 per cent for Alphabet compared with a rise of 8.3 per cent for the S&P 500.
If earnings estimates get wobbly, so do bull cases premised on forward valuations.
The price-earnings ratio of the Nasdaq 100 Index hit a four-year low below 20 last month and the S&P 500’s 12-month forward multiple is hovering near the lowest level in over five years.