EC What Is Weighing On Macy's (M) And Other Department Store Stocks?

The bearish narrative is that we have reached the end of the economic cycle when growth inevitably turns south. Macroeconomic data doesn’t support this narrative currently, but these things are hard to decipher in real time anyway.

My reading of the economic tea leaves is a lot more favorable. While I acknowledge the weakness in Europe, the outlook for the U.S. economy continues to be positive, with growth modestly below the preceding year’s level, but still very stable. The stronger than expected Q1 GDP growth rate reconfirms this view, even though the elevated GDP growth reading benefited from a couple of ‘lower quality’ drivers. And other key regions of the world, particularly China, are showing signs of ‘green shoots’.

We will know either way as we move through the rest of this year, but my money is on continued growth.

Second, driving the earnings growth challenge is widespread margin pressures across all major sectors. While the pace of revenue growth has come down as well, but the top-line deceleration is a lot less pronounced than is the case with earnings.

Net margins for the 450 index members that have reported results are 12.1%, which compares to 12.6% for the same group of index members in the year-earlier period, as you can see in the comparison chart below.

A big reason for this margin issue is the tough comparisons to last year when margins got a big boost from the tax-cut legislation. But some cyclical factors are at play as well, with many companies on the earnings calls complaining about rising material, transportation and payroll costs.

Third, and most importantly, estimates for the current period (2019 Q2) have been coming down as companies have been reporting Q1 results and sharing their outlook for business trends.

Total Q2 earnings for the S&P 500 index are expected to be down -1.4% from the same period last year on +4.5% higher revenues, with the growth pace steadily coming down in recent days.

That said, the pace and magnitude of negative revisions to Q2 estimates is lower than what we had been seeing at the comparable period in the preceding quarters.

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For an in-depth look at the overall earnings picture and expectations for Q1, please check out our weekly Earnings Trends report  more

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