EC The Market's Earnings Uncertainty

Apple (AAPL - Free Report) became the latest company to guide lower citing slowing economic growth. China figured prominently in the iPhone maker’s woes, a key market that has been in the spotlight lately for economic reasons, a big part of which is a result of its trade spat with the U.S. But China isn’t the only major market suffering economic weakness, the outlook for Europe and a number of other regions isn’t that favorable either.

The market’s collective economic view has been that while growth in these international markets was slowing, the U.S. economy was expected to sustain its momentum even though growth was expected to moderate a bit. Thursday’s factory sector ISM survey reminded market participants that the U.S. economy wasn’t totally immune from these global cross-currents, though Friday’s blockbuster labor market reading has eased some of those worries.  

This uncertain global economic backdrop has raised legitimate concerns about consensus earnings estimates. This earnings uncertainty compounds the market’s pre-existing worries about Fed policy and global trade.

Earnings estimates for 2018 Q4 and full-year 2019 have been coming down lately, but they likely have even more room to go down given the headwinds. The chart below shows how estimates for 2018 Q4 have evolved since the quarter got underway.

Q4 estimates have come down for 15 of the 16 Zacks sectors, with the Transportation sector as the only one that has experienced positive estimate revisions, a reflection of the pullback in fuel expenses. Estimates have come down the most for the Conglomerates, Construction, Consumer Discretionary, Utilities and Basic Materials sectors.

This type of negative revisions is not unusual in historical terms, though they do represent greater estimate cuts than was the trend in the last few quarters. Please note that the negative revisions trend isn’t restricted to Q4 estimates, as expectations for full-year 2019 have started coming down in a meaningful way lately as well, as the chart below shows.

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Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. ...

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