The reporting season for 3Q corporate profits will get underway soon, and stock analysts are painting a gloomy picture, calling for aggregate S&P 500 earnings to be down by more than 4% versus the same period in 2018, based on data compiled by S&P Capital, according to CFRA. This would represent the largest year-over-year (YOY) decline since 2016, one reason that the S&P 500 is down by 0.8% so far in October, for its worst start to a calendar quarter in more than three years. Moreover, the index has registered a paltry 1.74% gain over the past 12 months.

“If I had to tattoo something on my arm, it would be ‘stocks chase earnings,’” Mike Bailey, director of research at FBB Capital Partners, told the The Wall Street Journal about the impact of corporate earnings on equity prices. “We’re a little more cautious than we were even a couple weeks ago.”

"Negative S&P 500 EPS growth in 3Q will be driven by sectors with the highest international revenue exposure," Goldman Sachs says in its latest US Weekly Kickstart report. These are energy (-31%), information technology (-9%), and materials (-7%). "With more than 40% of sales derived abroad, Energy, Info Tech, and Materials are highly sensitive to trade tensions and the slowdown in global growth," Goldman adds. An 18% drop in oil prices is another negative for energy stocks. Meanwhile, Sam Stovall, chief investment strategist at research firm CFRA, sees even more widespread dangers.

Significance For Investors

"Q3 declines are also expected for six of the 11 sectors in the S&P 500 driven by a slowing U.S. economy as a result of the lingering trade dispute with China," Stovall writes in his Q3 EPS Outlook report released today. In addition to the three sectors highlighted by Goldman, Stovall sees earnings declines ahead for real estate (-17%), utilities (-4%), and consumer staples (-1%).

Key Takeaways

  • 3Q 2019 EPS is set to fall YOY in most of the S&P 500 sectors.
  • Plunging profit margins are offsetting sales growth.
  • Trade tensions are hurting companies with large overseas sales.
  • Slowing global economic growth is another negative.

Stovall's data sources (CFRA, Action Economics, and S&P Global) are even more downbeat than Goldman on materials, projecting a 21% EPS plunge. On the other hand, Goldman is more positive on real estate, with its sources (FactSet and its own research) forecasting a 5% EPS increase, leading the S&P 500.

More troubling perhaps than absolute earnings declines, Goldman says that 3Q profit margins are set to decline in all 11 S&P sectors. Excluding financials and utilities, the average profit margin is projected to fall by 108 basis points to 10.6%, more than offsetting positive revenue growth of 5%. On the bright side, they believe that effective tax rates may prove to be lower than expected, generating some positive earnings surprises. They also note that, although aggregate S&P 500 earnings will fall, the median company in the index is expected to post EPS growth of 3% in 3Q.

Looking Ahead

Meanwhile, a large number of companies are trying to manage expectations downwards, releasing guidance that forecasts lower 3Q earnings than analysts had been projecting. Casino operator Wynn Resorts Ltd. (WYNN), department store chain Macy’s Inc. (M), and chicken processor Tyson Foods Inc. (TSN) are among the major corporations that have issued gloomier outlooks recently, per FactSet and the Journal.