Q1 2019 EPS Growth Expected To Be Just 3.55%

Q1 2019 - Earnings Estimates Start To Fall Off A Cliff

The stock market is rallying way too much compared to how much earnings estimates are falling.

As you can see from the table below, Q1 EPS growth estimates have fallen from 5.54% at the start of the year to just 3.55% as of January 23rd. There are still a couple months before Q1 2019 earnings season starts.

That means there is still room for estimates to fall further if the firms which haven’t reported Q4 results yet have weak guidance. Q2 and Q3 estimates have fallen similarly as they are down from 5% and 4.91% to 3.62% and 3.37%. It’s possible economic growth rebounds by the 2nd half of 2019. But as of now, it looks like 2019 will have low single-digit earnings growth.

The Q4 EPS beat rate has been solid at 69.5%, but the sales beat rate is only 49%. During the trough of the financial crisis, firms beat sales estimates by about 45%. Firms can always beat EPS estimates if the bar is lowered enough.

The trend in earnings estimate changes has been negative. Earnings estimates started 2018 by being raised, but each subsequent quarter has seen them weaken more. By the end of 2018, estimates were falling.

Q1 2019 - Good & Bad Earnings News

The bad news is that estimates are now falling more than average. FactSet calculated the change in estimates for the 1st half of the following year in the period from October 15th to January 15th.

Estimates for 1H 2019 fell 4.5% which is worse than the 15-year average decline of 2.4%. Since the recovery started, only estimates for 1H 2015 were worse as they fell 6.6%. The sectors with the biggest estimate declines are energy, technology, and materials.

Their estimates are down 29.7%, 7.2%, and 5.7%. Energy earnings estimates can easily rebound if oil prices continue to rally as they have in the past few weeks. However, the weakness in technology estimates is more concerning as it signals global growth is slowing.

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