With more than 80% of S&P 500 companies already reported their fourth-quarter financial results, it’s becoming clear that sales growth is slowing but profit growth has plunged.
Despite the market comeback this year, the traders worry that an earnings decline will kill the bull market. Profit margins are the tightest since 2017 with companies blaming to raise labor and material costs. Thus, the S&P’s collective after-tax profit margins have dropped to 10.7% from 11.3%.
The total earnings for the 84% S&P 500 members that have reported Q4 results already are up by 12.7% from the same period last year on 7.3% higher revenues, with 67.1% of the reports beating EPS estimates and 62.1% beating revenue estimates.
As expected, Q4 earnings and revenue growth is tracking notably below what we had seen from the same group of 419 index members in other recent periods. Surprisingly, positive EPS beats have been the lowest in more than 5 years. The estimates for Q4 had come down significantly ahead of the start of this earnings season. But the relatively low EPS beats suggest that estimates were either not low enough or that business conditions weakened unexpectedly.
The strongest year-over-year earnings growth in Q4 is expected to come from the Energy, Transportation, Construction, Aerospace, and the Retail sectors. Excluding the Energy sector’s strong growth, Q4 earnings growth for the rest of the index comes down to +10.4% (from +13.6%).
Estimates for Q1 as well as full-year 2019 have been steadily coming down, with 2019 Q1 earnings growth now in negative territory, the first quarterly earnings decline since 2016 Q2. First-quarter earnings are expected to decline by 0.7%, while second-quarter earnings are expected to be up a measly 3.4% and seem vulnerable to further downward revisions.
Regardless, last year’s 6.2% decline in the S&P 500 is being hailed as proof that the market has sniffed out an imminent drop in earnings. This news is being greeted with the usual round of hand-wringing from analysts and strategists, many of whom are predicting little if any upward movement in stocks this year. Especially after a 10% snap back in the market so far this year.
In the S&P 500, roughly 40% of profits are earned outside the United States, so on the background of the economic stall in Europe and a slowdown in Asia fueled by weaker growth in China, the US corporations definitely will be affected.
Moreover, the higher costs of labor and basic materials such as steel and plastics are hurting many companies and impacting profit margins.
Finally, there are also sector-specific issues. The decline in oil prices at the end of last year (since reversed) caused estimates of oil profits to plunge for 2019, and semiconductors are facing intense competition and oversupply.
But none of this necessarily means the market is in for a protracted bout of price declines. It’s useful to remember the two developments that historically have killed bull markets: sharp and sudden price hikes by the Federal Reserve and a recession.
Walmart surpassed all expectations for earnings and revenue for the fourth quarter
The world’s largest retailer Walmart surpassed earnings and revenue expectations, and online sales have risen in the fourth quarter of last year. The financial statement of the retailer was the key event in this week’s earnings calendar.
The company’s stock price rose sharply to the New York Stock Exchange before its launch.
Walmart is the first major retailer to report its results for the fourth quarter, and its performance is yet another proof that has already increased his advantage over competitors and is only competing with Amazon.
The company’s fourth-quarter earnings were 3.69 billion USD or 1.27 USD per share. The company, located in Bentonville, Arkansas, reported revenues of 138.79 billion USD, which also exceed expectations.
The sales in Walmart stores in the US rose by 4.2%, again above forecasts. The company’s presentation is encouraging after the grim government sales report of US retailers in December.