Off the Charts: More blowout earn­ings. What’s next?

The Mercury (Pottstown, PA) - - BUSINESS - By Stan Choe AP Busi­ness Writer

NEW YORK >> For­get about “What have you done for me lately?” The big ques­tion in­vestors will be ask­ing com­pa­nies this up­com­ing earn­ings sea­son is: What will you do next?

Com­pa­nies are lin­ing up to tell in­vestors how much they made dur­ing the last three months of 2018, and the re­ports get go­ing in earnest this up­com­ing week with Cit­i­group and a slew of other banks on deck. Ex­pec­ta­tions are high, and Wall Street is fore­cast­ing a fifth straight quar­ter where profit growth topped 10 per­cent for S&P 500 com­pa­nies.

Mar­kets could use some en­cour­age­ment fol­low­ing the worst De­cem­ber for stocks since the Great De­pres­sion. But in­vestors are likely less in­ter­ested in com­pa­nies’ per­for­mance over the last three months as what they have to say about the trends for 2019.

Eco­nomic growth around the world is ex­pected to slow this year, and ris­ing pay­roll costs could be eat­ing into com­pany prof­its. Try­ing to judge the im­pact on prof­its, in­vestors will pay more at­ten­tion to the con­fer­ence calls that CEOs hold with an­a­lysts and share­hold­ers af­ter re­port­ing their quar­terly re­sults.

“The mar­ket is go­ing to be very fo­cused on the calls,” said Ernie Ce­cilia, chief in­vest­ment of­fi­cer at Bryn Mawr Trust. “It’s go­ing to be about rev­enue ex­pec­ta­tions and mar­gins more than any­thing.”

An­a­lysts have been ex­pect­ing profit growth to slow for com­pa­nies in 2019 fol­low­ing their blowout 2018, when the first year of lower tax rates pro­vided a big, one-time boost. Wall Street has been slash­ing its fore­casts for 2019 profit growth in re­cent weeks

With­out the tax ben­e­fit, com­pa­nies need to ei­ther drum up more rev­enue or ex­tract more profit from each $1 in sales to push their prof­its higher. And some big name com­pa­nies have cited pain caused by other chal­lenges, such as the global trade war.

Ap­ple, for ex­am­ple, shocked Wall Street when it said this month that China’s econ­omy was slow­ing more sharply than it ex­pected and slashed its rev­enue fore­cast for the fi­nal quar­ter of 2018. Ri­val Sam­sung cited weak global de­mand for chips when it said it ex­pects a roughly 29 per­cent drop in op­er­at­ing profit for the fourth quar­ter. Com­pa­nies, mean­while, are fi­nally giv­ing big­ger pay raises to their em­ploy­ees. Af­ter years of slug­gish gains, work­ers’ hourly earn­ings rose 3.2 per­cent last month for the strong­est growth since 2009. While that’s good for work­ers, it can mean lower profit mar­gins for com­pa­nies un­less they can pass along their cost in­creases to their cus­tomers. Given the slow­ing econ­omy, that may not be easy.

That’s why Wall Street is now fore­cast­ing earn­ings growth for S&P 500 com­pa­nies to drop by more than half to 7 per­cent this year from 20 per­cent in 2018. Three months ago, an­a­lysts were fore­cast­ing a health­ier 10 per­cent jump in 2019 earn­ings.

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