Q1 Earnings Season: What To Expect

The first-quarter reporting season is imminent, and a lot of the debate centers around whether corporate profit growth — which has been a key pillar of economic growth — will continue to catch fire. 

S&P 500 earnings have increased every quarter since the second quarter of 2016, with the fourth quarter of 2018 marking the tenth straight quarter of profit growth, according to data from FactSet.

Will the first quarter mark the end of the winning streak? 

Bracing For A Downturn

FactSet projects a 4.2-percent decline in the profits of S&P 500 companies in the first quarter of 2019.

LPL Financial's Chief Investment Strategist John Lynch forecast flat earnings growth despite consensus expectations for a decline. Given the weaker growth and trade uncertainty, companies have cut estimates by an above-average margin, giving themselves the leeway to clear a lower bar, Lynch said in a note. 

Lynch expects margins to take a hit from commodities, currency and tax adjustments, among other factors, while he said stable wage growth, productivity gains and still-accommodative interest rates could minimize the negative impact on margins.

Likely Sector Winners, Losers

Out of the 11 S&P classes, seven sectors are expected to report a year-over-year decline in earnings, with three of these — energy, materials and IT — likely to report double-digit profit declines.

Apple Inc. AAPL, which has seen a strong run in its shares in the first quarter, along with Micron Technology, Inc. MU, will likely pace the profit declines in the IT sector, according to FactSet. 

With average first-quarter oil prices down over 11 percent from last year, energy companies could see a 20-percent drop in earnings.

Utility and health care are among the four sectors that are expected to buck the downtrend and report year-over-year earnings growth.

Outlook Beyond Q1

Despite the muted first-quarter outlook, LPL estimates mid-single digit earnings growth for S&P 500 companies in 2019 thanks to positive catalysts such as fiscal stimulus, robust manufacturing output, a healthy labor market and the resolution of the Sino-American trade dispute.

The firm estimates cumulative earnings per share of $172.50 for S&P 500 companies, representing 6-percent growth. This compares to the consensus estimate of $169.

"If some of these positive catalysts do not play out as we expect, however, we could see a number closer to $170 than our $172.50 number," LPL said. 

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