Don’t expect the second quarter earnings season to be much of a party.
[By the way, IBM reports its financials on Wednesday and Microsoft does so on Thursday. Big Blue’s financials will be the last without impact from Red Hat, which became part of Big Blue last week when their $34 billion merger closed. ]
Analysts anticipate that earnings growth will be essentially flat compared to last year, just as it was in the first quarter. There’s still hope of a rebound in the second half of the year. But that optimism largely depends on guidance from companies in coming weeks.
“The risk is that the company guidance ends up being negative,” said John Normand, head of cross-asset fundamental strategy at JPMorgan Chase. “It’s not just about the actual earnings.”
Executives have worked hard to manage expectations in advance of their official announcements.
“The way the earnings game is played, the companies guide the analysts low,” said Nick Raich, CEO of The Earnings Scout, a research firm. “Conservative estimates [then] pave the way for an earnings beat.”
Companies have been particularly circumspect this year because of inevitable comparisons to 2018, when gangbuster earnings were padded by US tax cuts.
But the looming slowdown in global growth, made worse by trade tensions, is also forcing businesses to rein in their outlooks.
Daimler, for example, warned of a slump in 2019 profits after recalls, legal issues and weak demand for cars contributed to a rough second quarter.
Others could find themselves in a similar position. Roughly 40% of profits from companies in the S&P 500 are made overseas, according to Raich.
Watching the stock market, you wouldn’t know earnings are poised to be weak. A possible rate cut from the Federal Reserve this month has sent US stocks to record highs, even as tariffs on hundreds of billions of dollars worth of goods from United States and China remain in place.
“The positive impact of lower borrowing costs on profits will outweigh the negative impact of tariffs,” Raich said.
But it’s a precarious equilibrium.
“The status quo is manageable as long as the Fed is easing,” said Normand. “What I’m not so confident about is how much easing it would take to offset yet another hike in tariffs.”
In the immediate term, the biggest concern for markets is insight on what’s next. If guidance is particularly gloomy, stocks could fall 5%, Normand said.