US stocks facing a bumpy ride

Evidence is growing that the party in US stocks is over. As a strong fourth-quarter reporting season for S&P 500 draws to a close, investors have little to look forward to in 2019. Wall Street expects earnings growth during the first quarter to turn negative for the first time in three years. There is evidence that the downward momentum will continue throughout the year.

Tax cuts that came into effect at the start of 2018 gave US companies a one-off boost to earnings. As the benefit of these cuts disappear, a number of negative factors will begin to dominate. As profit margins come under pressure, investors should expect increased volatility in the US market and more profit warnings. Analysts forecast a run of poor quarters for earnings growth up until the fourth quarter of 2019. A turnaround is then expected, but even this hope looks to be a faint one.

Higher US interest rates and fears about slowing global trade are two factors leading analysts to take a more bearish stance. Earnings growth of about 5% is expected in total for this coming year, half of what was expected in November 2018. But even that forecast is predicated on a strong rebound at the end of the year when earnings are expected to jump almost 10%.

Analysts at Morgan Stanley believe an “earnings recession” will be confirmed with first-quarter results — and that another quarter of declines will follow. It is the consensus anticipation of a final period rebound that is the least credible. Such turnarounds rarely follow consecutive quarters of declining profits.

Since 2004 the average spread between any quarter’s growth and that of the previous three-quarter average is only 0.3 of a percentage point. This year that gap is a whopping 8.6 percentage points. The music and dancing has already come to a halt. Investors should expect US profit estimates to decline as the year progresses, and valuations to adjust accordingly. /London, February 13.