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Here’s Why the US Corporate Earnings Decline Won’t Hurt the Dow Jones

Last Updated March 4, 2021 2:53 PM
Joseph Young
Last Updated March 4, 2021 2:53 PM

For the first time since 2016, U.S. corporate earnings are projected to drop by 0.8 percent per share in the first quarter of 2019. But, the projection had no visible impact on the Dow Jones and the rest of the U.S. stock market.

In December 2018, Wall Street analysts forecasted U.S. corporate earnings to grow by 3.3 percent. The data provided by FactSet obtained by FT show that analysts have slashed their forecast from 3.3 percent growth to a 0.8 percent decline.

The drop in U.S. corporate earnings comes in a period in which large conglomerates, especially in the tech sector like Apple and Samsung, are struggling to deal with weakening revenues.

Why the Dow Jones Remains Unaffected

Since Monday’s opening bell, the Dow Jones has increased by 0.4 percent and was unaffected by the projection.

Dow Jones Feb 5 2019

Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, told FT that margin deterioration is likely going to remain a theme for 2019 as corporations face uncertainties related to the U.S.-China trade war.

“Margin deterioration is going to be a big theme this year. What is driving that deterioration is higher labour costs and the friction created by the trade war, which disrupts supply chains,” he said.

Most major conglomerates with poor earnings reports have attributed their lackluster performance to intensifying geopolitical risks.

Last week, as CCN.com reported, Samsung recorded a 31 percent decline in net profits as various areas of the firm including its mobile phone and semiconductor businesses faced hardship.

A growing number of conglomerates are revising their earnings to the downside. Yet, the Dow Jones has not shown signs of slowing down from its recent recovery.

It is likely that the confidence in the U.S.-China trade talks and the prospect of a deal by March 1 by the majority of investors in the U.S. stock market has soared.

If the geopolitical risks surrounding the U.S. and China have been the driving factor of the weakening global economy, the establishment of a comprehensive trade deal would eliminate the risks.

us china trade war dow jones
An amicable end to the U.S.-China trade war could ensure a sustained stock market recovery. | Source: Shutterstock

The growing anticipation towards the U.S.-China trade talks, the Federal Reserve’s patience in maintaining its rate at 2.25 percent to 2.5 percent, and the strong performance of key sectors like the oil industry have  contributed to the recovery of the Dow Jones.

Nicholas Colas, the co-founder of DataTrek, said that investors are expecting the struggles of major conglomerates are temporary and that the market is expected to recover in the second quarter.

The only way companies could recover in a similar time frame in the second quarter of 2019 would be if a trade deal is achieved, which many investors believe will happen.

“The market is trading on the hope that this is a temporary issue and that we start to see some growth in the second quarter and that the back half of the year should be a whole lot better,” Colas said.

Oil Industry Lifted Tremendous Pressure From Dow Jones

Even up until December 2018, oil companies were expected to end the year with a poor quarter as oil prices declined.

But, reports revealed that Exxon and Chevron, the two oil giants, recorded a combined profit of $84 billion, surpassing the expectations of analysts with ease.

“These companies have figured out how to operate in this new environment, and they have adjusted well. The key going forward will be maintaining discipline. This is now a low-growth industry, so you’ve got to invest well,” Edward Jones analyst Brian Youngberg said .

The unexpectedly strong performance of the oil industry combined with the solid earnings released by leading car makers in the likes of Ford have eased the pressure on the Dow Jones and the rest of the U.S. stock market.

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