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Trade tensions and the risk of a recession lower corporate earnings forecasts

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The first-quarter corporate earnings season is almost over and the analysts remain optimistic that the worst didn’t happen. According to the analysts of FactSet, 76% of S&P 500 companies have reported a positive EPS surprise and 59% have reported a positive revenue surprise. Te blended earnings decline for the S&P 500 in the first quarter is -0.4%, which is the worst figure since Q2 2016. However, the expectations before the kickoff of the reporting season were quite darker.

However, looking more globally, the combined net profit of 1,869 companies, excluding financials and energy, was down by only 0.1% year-on-year (YoY) during the January-March 2019 quarter — their worst showing in the last six quarters. In comparison, earnings were up 18.7% YoY during the fourth quarter (Q4) of 2017-2018 and 7.7% YoY during the October-December 2018 quarter.

The corporate earnings were hit by a combination of lower demand growth, trade constraints, and a slowdown of the global economy. All these factors keep the Wall Street indexes under pressure, as well as the global equities.

Last week, the news about possible lowering interest rates in the US gave wings to the markets and pushed corporate stocks up. Dow Jones even registered its second-best daily jump since the beginning of the year, adding more than 500 points on Tuesday.

However, two of the leading banks on Wall Street, Bank of America and Citigroup, lowered their US corporate profit forecasts while pointing out the risk of a recession as trade tensions escalate. Savita Subramanian, who heads the US equity strategy team at Bank of America, cut her 2019 estimate for S&P 500 companies by 2 USD per share to 166 USD, saying import tariffs are set to increase costs, hurting profits for American firms. Tobias Levkovich, who acts as a chief US equity strategist at Citi, trimmed his projection by the same amount, to 170 USD per share.

Thus, following the relatively tense earnings season, we are heading to another, where most of the S&P 500 companies have issued negative EPS guidance.

During the first two months of the second quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all the companies in the index for the second quarter) dropped by 2.1% (to 40.61 USD from 41.46 USD) during this period.

Last week were published the financial statements of small-caps, such as the technology company Coupa Software, file sharing service Box Inc, jewelry and specialty retailer Tiffany & Co, telecommunications company Ciena Corporation. Most of the above-mentioned companies reported better-than-expected earnings for the quarter. However, the retail chain Kirkland’s Home and the clothing brand and retailer Guess Inc, which also posted their statements this week, were deep into the red, having disappointing results for the quarter sales and profit.

The key event on the corporate market is the financial statement of Salesforce.

Salesforce earnings beat on the top and bottom lines

Salesforce reported better-than-expected earnings for the first quarter of its 2020 fiscal year.

The company’s revenue grew 24% in the quarter to 3.74 billion, beating analysts expectation for 3.68 billion USD.

Salesforce continued expanding its product portfolio beyond sales software and into marketing, customer support, and services. The company is also seeing increased demand for its MuleSoft offerings, after spending 6.5 billion USD on the data connectivity software vendor last year.

In the quarter Salesforce’s Service Cloud product produced 1.02 billion USD in revenue, crossing the 1 billion USD mark for the first time.

Salesforce said it expects earnings in the second quarter of 0.46 USD to 0.47 USD per share, excluding certain items, on 3.94 billion USD to 3.94 billion USD in revenue.

For the full fiscal year, Salesforce said it sees 2.88 USD to 2.90 USD in earnings per share, excluding certain items, on 16.10 billion USD to 16.25 billion USD in revenue. Analysts polled by Refinitiv were looking for 2.66 USD in earnings per share, excluding certain items, on 16.12 billion USD in revenue.

In the latest quarter, Salesforce announced a new business from investment bank Evercore, which said it will use the software to help bankers expand their client relationships. Salesforce also rolled out artificial intelligence enhancements in the period and announced its combination with Salesforce.org, the company’s philanthropic arm. Salesforce previously said it was expecting that deal to contribute around 150-200 million USD in revenue for its 2020 fiscal year.