E The S&P 500's YTD Rally Is More A Function Of Liquidity Than Earnings Results And Sentiment

Keep in mind that the earnings growth slowdown was to be expected and has been forecasted for the Q4 2018 period.

What might be of more concern to investors is that the EPS blended growth estimate for the first quarter has dropped to 1.3% through Friday, from 1.9% a week ago and from 6.7% on Sept. 30, according to FactSet Data. The first quarter is shaping up to witness the slowest growth since it rose just 0.3% in the 2nd quarter of 2016 to snap a five-quarter streak of declines. The following table shows what analysts expected through Friday in terms of year-over-year EPS growth for the S&P 500 and each of the S&P 500’s 11 sectors for the fourth and first quarters, as well as the change in estimates since Jan. 11 and Sept. 30.

As I source earnings forecasts from various data trackers and economists, Thomson Reuters remains the most objective and with the best track record. Here is what Reuters is forecasting for the Q4 2018 reporting season:

Aggregate Estimates and Revisions 

  • Fourth-quarter earnings are expected to increase 14.2% from Q4 2017. Excluding the energy sector, the earnings growth estimate declines to 12.2%.
  • Of the 55 companies in the S&P 500 that have reported earnings to date for Q4 2018, 76.4% have reported earnings above analyst expectations. This is above the long-term average of 64% and below the average over the past four quarters of 78%.
  • Fourth quarter revenue is expected to increase 5.6% from Q4 2017. Excluding the energy sector, the revenue growth estimate declines to 4.7%.
  • 2% of companies have reported Q4 2018 revenue above analyst expectations. This is below the long-term average of 60% and below the average over the past four quarters of 72%.
  • The forward four-quarter (19Q1 – 19Q4) P/E ratio for the S&P 500 is 15.4.

The real question posed to analysts and investors remains centered on FY19 EPS. A great many variables will play a role in corporate earnings and revenues going forward. Here is a list of some of these variables below:

  1. USD Index
  2. Global trade feud resolution
  3. Capital spending
  4. Housing sector trends
  5. Government Shutdown
  6. Consumer spending trends
  7. Fed remains dovish

For the current week, below is a table of expected earnings reports by day:

All of the bullet-point issues have the potential to be a headwind or tailwind in 2019. The consumer has remained buoyant throughout 2018 and as the trade feud wagered on. But signs of a slowing consumer may be on the horizon if consumer sentiment is any indicator.

Consumer sentiment dropped to its lowest level since before the U.S. presidential election in 2016 amid growing concerns over U.S. economic growth, according to data released Friday. The University of Michigan consumer sentiment index fell to 90.7 this month, its lowest since October 2016, from 98.3 in December, preliminary data showed. Economists polled by Refinitiv expected the index to fall to 96.4.

“The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies,” said Richard Curtin, chief economist for the Surveys of Consumers. “Aside from the direct economic impact from these various issues on the economy, the indirect effect meant that half of all consumers believed that these events would have a negative impact on Trump’s ability to focus on economic growth.”

The consumer data set will go through one more revision for the stated period. Nonetheless, the survey showed that the manmade issues of 2018 have finally impacted consumer sentiment to some negative degree. The good news is that the issues of concern are, in fact, manmade and therefore can be reversed. The biggest near-term threat to consumer spending and economic growth in the U.S. centers on the government shutdown, which is now the longest shutdown in history and seemingly without near-term resolution in sight.

Over the weekend, President Donald Trump stood before the nation in efforts to put forth a deal of compromise that would grant DACA residents temporary status in exchange for border wall funding. Unfortunately, the opposing side has already issued the compromise as being a “non-starter”.


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