Dow Jones Industrial Average (DJIA) futures traded 80 points lower on Monday, pointing to a weak stock market open. It’s a nervous start to the week as third-quarter corporate earnings season kicks off. And things look ugly.
As Wall Street banks line up to report their figures this week, it’s easy to forget the US is already in the grips of a technical earnings recession, defined by back-to-back quarters of decline. Q3 looks set to extend the drop to three-straight quarters of negative earnings growth. The biggest culprit? China-US trade war.
“The biggest worry from investors continues to be the China black cloud which is casting a long shadow over semiconductor and tech names, including Apple, across the board” – Dan Ives, Wedbush Securities.
— Bloomberg Quicktake (@Quicktake) October 11, 2019
Dow spikes lower on Monday
Dow Jones Industrial Average (DJIA) futures fell 70 points at 5.20 am ET as analysts digest conflicting reports over the US-China trade agreement.
The earnings recession no-one is talking about
There’s no shortage of recession talk out there right now but most of it fails to mention the technical recession already gripping US companies. Corporate earnings declined in the first and second quarter in 2019, and third looks similarly weak.
Analysts are expecting an average decline of 4.1% across S&P 500 companies. If accurate, it will be the longest streak of earnings contraction since 2016.
Energy and technology stocks are expected to feel the heat. Energy companies could take a 32% earnings hit after plunging oil prices this quarter. Technology stocks face a different problem: the trade war. Third-quarter results will give investors an insight into how much Trump’s tariffs have tightened around US companies.
Earnings next week:
Bank of America
Kansas City Southern
— Carl Quintanilla (@carlquintanilla) October 11, 2019
Threat to the Dow’s all-time high?
Despite the slowing earnings growth, the Dow Jones remains within touching distance of all-time highs. Could this earnings season be the straw that breaks the camel’s back?
It all depends on how the results are presented. In the last two quarters of decline, companies pulled a sleight of hand trick by projecting worse earnings ahead of the call. The trick meant that 75% of companies in the S&P 500 actually beat expectations.
It masked the fact that total earnings still came in negative.
“Companies are still deploying buybacks at a rapid pace. Buybacks can make companies’ results appear better by boosting per-share earnings.”
Banks kick off Q3 earnings season on Tuesday
Wall Street banks are first in the firing line this week with Goldman Sachs, Citigroup, Wells Fargo, and JP Morgan Chase reporting on Tuesday. The banking sector faces a 1.8% slump in earnings growth due to the Fed’s lower interest rates putting downward pressure on bank profits.
Wednesday will play host to IBM, Netflix, Bank of America and Alcoa. Morgan Stanley and Honeywell report on Thursday, while American Express and Coca-Cola round out the week on Friday.