- The US stock market is approaching a do-or-die moment as US companies struggle to live up to investors’ lofty expectations.
- The market’s valuations have become stretched, creating near impossible growth expectations for 2020.
- This week as earnings season kicks off, investors can get a sense of whether or not the market can keep going.
Warnings about a US stock market crash have been plentiful over the past month as several key events threatened to take down the bull market we’ve all grown to love.
Despite news of escalating tension between the US an Iran and ongoing impeachment proceedings in Washington, stocks have continued to march higher. But this week could offer a day of reckoning to fearless investors who’ve remained committed to their equities positions despite the troubling headlines.
Key Market Moment
This week kicks off earnings season on Wall Street— offering arguably the most accurate snapshot into where the US stock market is heading. While investors certainly do trade on news, earnings growth is ultimately what supports the stock market in the long term.
Last year, the stock market climbed impossibly higher despite the fact that earnings growth was more-or-less flat. That led many to caution that valuations have become stretched, but investors pushed equities ever-higher blaming the trade war with China and global growth uncertainties for disappointing earnings reports.
Earnings for the S&PP 500 are expected to fall by 2% in the fourth quarter, finishing 2019 with four straight quarters of earnings declines.
In 2020, the US stock market will need to deliver. Earnings growth, profit growth— the whole package. Expectations for the stock market are lofty, despite being well below the gains seen in 2019. A FactSet poll showed that the majority of analysts are expecting to see earnings rise by nearly 10% in 2020. Sales growth is seen rising 5.4%.
That means US companies will have to post larger profit margins— something that may be difficult considering wage growth is likely to weigh on margins in the year ahead.
Deutsche Bank’s Binky Chadha says the market’s overzealous optimism is hard to justify. According to his calculations, current valuations assume the S&P 500 will offer 15% earnings growth this year. That’s significantly higher that Chadha’s own estimate of just 6%.
Earnings Kick Off Important for Stock Market Morale
This week will prove either the bulls or the bears right about the direction of the stock market in 2020 as the first handful of companies report Q4 earnings. Week 1 sets the tone for the upcoming earnings season, and this year that’s more true than ever as investors look for clues about whether or not a stock market crash is on the horizon.
Bank stocks are expected to get earnings season off to a good start. Although low interest rates have been weighing on lending profits, banks are expected to benefit from strength in the US economy and a lower jobless rate. As Stephen Biggar of Argus Research put it:
If you have a job, [or] you lose one and can easily find another one, then you’re current on your bills and you don’t have those defaults.
He also pointed to easier comparisons in Q4 which could ultimately see the banking sector deliver record earnings results and continue supporting the stock market’s rally.
What’s On Tap
Very few earnings of note, but the stock market will be keeping an eye on JP Morgan’s annual health-care conference, which kicks off on Monday. The healthcare industry has been shaken up by talk of ‘Medicare for all” this election cycle, so it’s worth watching what some of the biggest names in the sector have to say at the 3 day conference.
Bank stocks take over the spotlight on Tuesday with JPMorgan Chase (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), and Citigroup (NYSE:C) all due to report.
JPM is expected to report EPS of $2.33 on revenue of $27.92 billion.
WFC is expected to report EPS of $1.12 on revenue of $20.12 billion.
C is expected to report EPS of $1.84 on revenue of $17.89 billion.
The parade of bank earnings continues Wednesday with Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) set to report. United Health (NYSE:UNH) is another notable non-financial release on Wednesday. On top of that, the US and China are finally expected to sign a phase one trade deal.
Bank of America
BAC is expected to report EPS of $0.68 on revenue of $22.38 billion.
GS is expected to report EPS of $5.49 on revenue of $8.49 billion.
UNH is expected to report EPS of $3.77 on revenue of $61.06 billion.
Thursday will be the conclusion of big bank earnings when Morgan Stanley (NYSE:MS) reports. The stock market will also be watching for CSX (NASDAQ:CSX) to report, as the railroad firm is often considered a bellwether for economic health.
MS is expected to report EPS of $1.03 on revenue of $9.77 billion
CSX is expected to report EPS of $0.98 on revenue of $2.93 billion.
Friday’s big earnings release is Schlumberger (NYSE:SLB), an oil stock. SLB is expected to give investors a clearer picture of where the commodity is heading in light of the tension in Iran.
SLB is expected to report EPS of $0.37 on revenue of $8.17 billion.