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Dow Futures on Edge as Eerie Parallel to 2018 Crash Emerges

Last Updated September 23, 2020 1:11 PM
Ben Brown
Last Updated September 23, 2020 1:11 PM

Dow Jones Industrial Average (DJIA) futures traded flat in early trading Tuesday, pointing to a nervous open on Wall Street. It comes as analysts at Bank of America, Morgan Stanley, and UBS all slashed profit expectations across the stock market  going into 2020.

“Totally absurd! Analysts are taking a knife to their 2020 profit estimates just when the S&P500 is about to set a new record! Analysts just cut S&P 500 estimates by the most since January” – Holger Zschaepitz, Welt .

It’s an eerier parallel to October 2018 when a raft of analyst downgrades triggered a 16% slide in the Dow Jones. Conditions are similar to last year with the US stock market hovering just shy of record highs. As Zschaepitz explained:

“Last year 2019 earnings estimates started rolling right before the market sell-off.”

earnings estimates stock market
This time last year, a raft of earnings downgrades triggered a rapid selloff. Source: Bloomberg

Dow futures flat on Tuesday

Dow Jones Industrial Average (DJIA) futures  were flat at 6 am ET as traders await earnings reports from McDonald’s and Procter & Gamble.

Dow (DJIA) futures stock market Tuesday
Dow Jones Industrial Average (DJIA) futures traded flat on Tuesday. Source: Yahoo Finance

S&P 500 futures  and Nasdaq Composite futures  were also traded flat.

Wall Street nervous about 2020 stock market earnings

Earnings season thus far has surprised to the upside with 81% of companies beating (admittedly damp) expectations. But Wall Street remain cautious about growth going into 2020. Analysts revised total S&P 500 profit expectations down 0.5% for 2020, the biggest shift in nine months.

DataTrek Research is among the most glum, predicting almost zero growth in the next twelve months. Co-founder Nick Colas cites high wages and slow sales growth for the miserable outlook. Even as Q3 earnings beat expectations, analysts continue to revise this quarter’s estimates down.

“Analysts are cutting Q3 earnings expectations even as companies report above consensus results. At the start of Oct the consensus had a 4.1% earnings drop for S&P 500 earnings. That fell to 4.6% the next week & is now worse at -4.7% even with a solid week of ‘beats’.” DataTrek Research .

But isn’t the Dow near all-time highs?

The negative sentiment seems at odds with the Dow and S&P 500’s lofty heights. As CCN.com reported, the stock market is within inches of all-time highs and expected to climb higher. How did this dichotomy emerge?

According to Morgan Stanley, it’s all down to the Fed. Analyst Mike Wilson said the warning signs from corporate earnings are being hidden by the Federal Reserve’s commitment to lower rates.

“Once the market gets past the initial relief [of Fed injections] it will have to contend with the deteriorating fundamentals.”

Earnings reports from Harley Davidson, McDonald’s, Hasbro, Procter & Gamble, and SNAP later today should give us another insight into the market’s fundamental health.