The new year started with big turbulence on the world markets. The uncertainty around the US-China trade relations, the unstable oil prices and forecasts for the delay in global economic growth, put the stocks under pressure and even the smallest grain of sand may cause a free fall.
Many in the market suspect that earnings estimates likely need to fall a lot more before stabilizing. The total Q4 earnings for the S&P 500 index are expected to be up by 11.8% from the same period last year on 5.6% higher revenues.
The negative revisions trend is widespread, with estimates for 15 of the 16 sectors are coming down since the quarter got underway. Estimates have come down the most for the Conglomerates, Construction, Energy and Consumer Discretionary sectors. The Transportation sector is the only one experiencing positive estimate revisions, a reflection of weakening oil prices.
But there was a serious turmoin on the world markets this week.
Apple shocked the markets with lowered revenue guidance
Apple’s shock earnings warning, which is the first one since 2002, has sent the stock price crashing, spreading the red wave from Asia to Europe and causing a serious drop in stock markets.
Even without serious earning reports expected for the week, the letter to investors of Apple’s CEO, Tim Cook, lowering its Q1 guidance, created turbulence on Wall Street and major indexes wiped out between 2.5% and 3.0% from their value.
On Wednesday Apple lowered revenue guidance to 84 billion USD, down from the 89-93 billion USD it had previously projected. The company lowered gross margin to about 38% from 38.0-38.5%.
While there have been multiple supply-chain reports suggesting that Apple was cutting iPhone orders, these are not always reliable, and the scale of the cut to guidance was a dramatic one. Tim Cook said that almost all of the missing revenue was in China, thanks to a combination of low economic growth in the country and tensions created by the Trump administration’s trade war with China.
However, there are several reasons why Apple is probably able to report record profits, even as Wall Street rings the warning bell.
First, Apple is charging more than ever for its iPhones, which means even if it sells fewer iPhones, it’s still making more revenue of each unit sold. This happened last February when Apple said that the average selling price of the iPhone increased by 100 USD on a year-on-year basis, a change driven by the iPhone X, which price starts from 999 USD.
The average selling price remained relatively flat last quarter when Apple reported it at 793 USD, but it could raise in Q1 if Apple sold a lot of its expensive iPhone XS Max over the holidays. The iPhone XS Max starts at 1,100 USD and costs as much as 1,449 USD if you upgrade the storage.
Thus, Apple may surprise the investors and Wall Street markets with more serious growth of earning per share. Moreover, Tim Cook said that revenue outside the iPhone business grew by almost 19% year-over-year, including all-time record revenue from services, wearables, and Mac. And revenues from services is also growing significantly to 10.8 billion USD. Thus, even iPhone sales to be slowing down, the company is still generating more from other businesses and diversification of its earnings is giving more sustainability.
Delta Air Lines earnings expected to grow
Delta Air Lines is expected to deliver a year-over-year increase in earnings on higher revenues when it reports results for the quarter ended December 2018. This airline is expected to post quarterly earnings of 1.27 USD per share in its upcoming report, which represents an increase of 32.3% YoY.
The revenues of Delta Air Lines are expected to be 10.87 billion USDF, increasing by 6.1% YoY.