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Starting in mid-2015, corporate profits for the S & P 500 declined for five consecutive quarters. During this period, the index suffered two corrections of 10%, largely due to the drop in oil prices.
Profits are expected to contract in the first quarter of this year and, although a slight increase is expected for the upcoming quarter, Wilson worries that the pressure on margins will lead to greater disappointment in the future as the year continues. Last month, Wilson lowered its S & P 500 earnings per share growth forecast for 2019 to 1%, from 4.3% to 1%, due to numerous downward revisions in earnings during the first quarter. fourth quarter reporting season.
Two recent economic data points last week amplified these concerns. Job cuts surged in February to reach the highest monthly total since July 2015, followed by US government employment data that largely missed expectations. The non-farm payroll only increased by 20,000 in February – the worst month since September 2017 for job creation.
"We believe that it is likely that the situation will worsen before it improves, given the downward adjustment of expected earnings expectations," he said. said Mr. Wilson.
In addition to these weak indicators, an accumulation of inventory, due in part to the adjustment of Chinese enterprises to the tariff of 10% set by the Trump administration on Chinese products worth $ 200 billion , could still weigh on growth. Amazon, for example, reportedly stopped ordering products from many of its wholesale sellers in the last two weeks – a sign that the online trading giant could take action to reduce inventory costs. This decision could have consequences for thousands of suppliers and, given the size of Amazon, macroeconomic data could suffer.
Wilson added that, in light of these concerns, Morgan Stanley was turning away from cyclicals to focus on defensive stocks. The bank recently downgraded the energy sector to equal weight, citing further expected declines in earnings guidance.
Recent data suggests that economic weakness outside the United States could pose an additional threat to US corporate profits. According to FactSet, international companies, which generate more than half of their sales abroad, are expected to experience a 11.2% decline in profits in the first quarter of 2019.
This figure is well below the profit estimates for the S & P 500 and for domestically focused companies. Wall Street expects a 3.4% revenue loss for the S & P 500, and a 1% growth for companies with more than half of sales coming from the US, according to FactSet.
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