Amid earnings reports for 2Q 2019, investors should pay close attention to 5 big themes in management commentaries and conference calls that are likely to define the second half of 2019. They include: the direction of the damaging U.S.-China trade war; a rising U.S. dollar that's hurting exports; falling commodity prices that may ease margin pressure for many S&P 500 companies; cloudy guidance by top management for 3Q results; and the odds that the current earnings recession will extend into 3Q and beyond. These themes were raised by leading Wall Street strategists in a detailed article in MarketWatch as outlined in the story below.

Key Takeaways

  • 2Q 2019 S&P 500 profits are projected to be down from a year ago.
  • Tariffs, the value of the dollar, and commodity prices are key factors.
  • Investors should pay close attention to forward-looking guidance.

Significance For Investors

The negative effects of lingering trade disputes and tariff wars should be a major concern for many companies. China, Europe, Mexico, and now India are among the trading partners with which the U.S. has disputes, and the prospects for swift and satisfactory resolutions are uncertain at best. Moreover, Federal Reserve Chairman Jerome Powell is among those who warn that these trade tensions are having a significant negative effect on the U.S. economy.

Dubravko Lakos-Bujas, the chief equity strategist at JPMorgan, told MW, “The importance of getting some sort of trade deal--that lowers trade barriers and gives large, U.S. companies some certainty over future trade policies--swamps that of Federal Reserve policy…because the difference between an escalation of the trade dispute and its resolution is large enough to have an even greater impact than the historic corporate tax cut instituted in late 2017.” 

The direction of the dollar also is a big factor. Against a basket of 6 major currencies, the U.S. dollar had an average daily value during 2Q 2019 that was 4.9% higher than it was during the same period in 2018, per data from FactSet Research Systems cited by MW. This is bound to have a negative impact on 2Q 2019 results, since almost 40% of the combined revenue for companies in the S&P 500 Index (SPX) comes from overseas markets, per the same sources.

Meanwhile, a basket of 20 key commodities fell in price by 10.5% year-over-year (YOY) in 2Q 2019, again per the same sources. While this is bad news for companies in the materials and energy sectors, other companies that use commodity inputs may enjoy increased profit margins. Whether they do will depend on how much pricing power they have. Firms with low pricing power in highly competitive markets may be forced to pass these savings along to customers. Likewise, firms with low pricing power will be forced to absorb increased costs produced by tariffs.

Looking Ahead

Recent consensus estimates are calling for a 3% YOY drop in 2Q 2019, per FactSet data cited by The Wall Street Journal. The earnings recession is projected to persist into 3Q 2019, according to FactSet data reported by MW. "Poor 2Q earnings are generally expected, but we are going to be more focused on guidance," Morgan Stanley's U.S equity strategy team, headed by Mike Wilson, writes in their current Weekly Warm Up report. The Morgan Stanley Business Conditions Index fell sharply in June and points to more contraction ahead.