The US third quarter 2019 earnings season kicks off on October 15 with companies like JPMorgan Chase and Johnson & Johnson.
Expectations continue to worsen as Brexit worries, Trump administration trade wars, slowing Chinese growth and a possible technical recession have hit confidence.
Consensus for revenues is stable with a 0.3% drop in the quarter, which would be the first since Q1 2018.. Companies listed on the STOXX 600 regional index are now expected to report a 3% drop in third-quarter earnings, worse than the 2.2% fall expected a week ago and compared with growth of 14.4% in the same quarter in 2018.
Commentators now believe it could be the largest quarterly fall since Q3 2016. As Goldman Sachs ’ David Kostin said “Margin compression is behind much of the decline, and sectors with high international exposure, like energy, technology, and materials will likely take the biggest hit.”
Whilst average EPS will fall, the median company is still expected to produce 3% earnings growth because big names in certain like Apple (AAPL), Pfizer (PFE) and Exxon Mobil (XOM).
The outlook for the fourth quarter and into 2020 will be interesting and I don’t believe it will be a pretty picture. After a bull run since 2010, earnings growth is running out of steam and there are many clouds on the horizon. Expect a continued rotation out of growth stocks into safer havens which can continue to raise prices and profits in a tough market.
The forward 12-month P/E ratio for the S&P 500 is 16.5. This P/E ratio is below the 5-year average (16.6) but above the 10-year average (14.8). Not a cheap market when earnings are stagnating.