Profits in first quarter expected to decline as company outlooks slip

For investors cheering this earnings season, there could be trouble ahead.

As the fourth-quarter results roll in, the S&P 500 is poised to post an average earnings growth rate of 12.4 percent, the fifth straight quarter of double-digit growth. These results have boosted the stock market, with the S&P 500 enjoying its best January in more than 30 years.

While companies are reporting great numbers, their outlooks are falling short. And that’s caused analysts to rapidly slash their earnings expectations for the current quarter. In fact, Wall Street’s expectations for earnings growth for the first quarter of 2019 have just turned negative with profits expected to fall on average by 0.8 percent, according to FactSet. That would mark the first year-over-year decline in earnings since the second quarter of 2016.

At the end of September, analysts expected first-quarter profits to increase by 6.7 percent on average, according to FactSet.

Fears of a global economic slowdown is to blame for the shortfall, according to Kristina Hooper, chief global market strategist at Invesco.

“And then there are other issues related to trade in some cases, whether it’s input cost narrowing target margin or supply chain disruption narrowing target margin,” she said in an interview.

This earnings season may seem upbeat so far on the surface. Many major companies are scoring big rallies on beats. In terms of price action, it’s even shaping up to be the best earnings season in nine years. But the bar was set very low.

Hooper pointed out the change of heart by the Federal Reserve on interest rates made investors overlook the declining earnings picture. The central bank held rates stable last week and pledged a “patient” approach to rate hikes, sending stocks to fresh highs.