US earnings to see first quarterly drop in three years, says Morgan Stanley
Updated : 13:45
Morgan Stanley cautioned on Monday that the upcoming first-quarter US earnings season could see the first quarter of negative year-over-year growth in three years, with earnings expected to shrink by 4%.
The bank said that while S&P 500 companies are likely to beat the significantly lowered bar for Q1, it will still end up in negative year-over-year growth territory "when all is said and done".
MS expects the tech sector to be the biggest drag, contributing a 2.1% drop to the headline number. Overall earnings in the sector are projected to be down 10.6%, with semiconductors and tech hardware expecting substantial declines in earnings growth of 24% and 16%, respectively.
The bank said it will be watching margin results very closely this quarter, after earnings last year were boosted by a one-time tax reform.
"Margin expansion was difficult to come by late last year and consensus estimates are embedding margin contraction for the first three quarters of 2019," it said. MS noted that estimates for 2019 S&P EBIT margins have already fallen by 0.8% since the third quarter of last year. It added that labour, inventory and excessive capital spending are the greatest areas of excess causing corporate margin pressure.
MS strategists said that while they underestimated the impact of the Federal Reserve's pivot on equity prices, the earnings recession is "just the beginning".
"With US stocks fully valued and the Fed maximum dovish at this point, we think there will need to be some evidence of a real turn in earnings growth for US stocks to advance much further. 1Q earnings season offers a gut check for a market looking for some evidence that the worst is truly behind us.
"We suspect this year's big rally in stocks has had a positive impact on corporate confidence. This could encourage them to maintain full-year guidance, which embeds a big second-half recovery in earnings growth. The question is whether the market will like that or instead prefer a lowered bar that is more achievable. We think it's a tough call but lean toward the latter."