Monday 15 July 2019 9:50 am Markets Talk

Three big questions corporate America must answer this week

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The seond quarter earnings season kicks off this week as investor attention for a while shifts away from central banks to how well actual companies are performing.

There are several big questions facing corporate America as we hit this important period.

Earnings recession

Earnings season is coming with fairly low expectations. Two weeks prior to earnings season 82 per cent of companies that had revised earnings estimates going into the reporting period had lowered them.

Wall Street usually lowballs ahead of earnings season, but the scale of the downward revisions is noteworthy. This happened ahead of the Q3 2018 earnings, just before we saw stocks slump into a bear market, albeit one that has proved very temporary.   


S&P 500 companies are expected to report a roughly 3 per cent decline in EPS this quarter.   Q1 earnings declined 0.29 per cent, therefore making this likely to become a full-blown earnings recession, that is, back-to-back year-on-year declines in EPS. In 2016, the last time this happened, we saw earnings decline for 4 straight quarters.

Trade concerns

Whilst we had a degree of détente at the G20, existing tariffs are still in place and no meaningful progress has been seen. There’s a growing acceptance that the US and China are in this for the long-haul. The US election cycle means we are unlikely to see a reason for Trump to do any deal until 2020. Whilst for now the mood is upbeat, in the event of no deal, the lack of progress through the rest of the year would likely begin to drag on sentiment and affect equity markets.

If corporates see additional tariffs being imposed their EPS forecasts would need to be revised substantially lower. The impact of the US-China trade war on earnings is yet to be fully felt but we could hear from a number of large-caps voicing concerns. The extent to which CFOs highlight worry about trade on EPS forecasts will be of particular importance. Of course we are likely to see some kitchen sinking with companies blaming trade for all manner of ills.  

Financials

Banks start the ball rolling this week. Big question over interest rates – rate cuts may well be coming in the US and this will have implications for banks. Net interest margin would likely fall although the easier credit conditions would offset some of the negative effects. Citigroup unofficially kicks off the earnings season on Wall Street today. How much will banks be affected by Fed rate cuts? In investment banking, is there anything from the Deutsche carcass worth stripping? 

Earnings Calendar this week

Pre-Market 15-Jul Citigroup – Q2 Earnings 
Pre-Market 16-Jul Johnson & Johnson – Q2 Earnings 
Pre-Market 16-Jul JPMorgan Chase & Co – Q2 Earnings 
Pre-Market 16-Jul Wells Fargo & Co. – Q2 Earnings 
Pre-Market 16-Jul Goldman Sachs – Q2 Earnings 
Pre-Market 16-Jul Domino’s Pizza – Q2 Earnings 
Pre-Market 17-Jul Bank of America Corp. – Q2 Earnings 
After-Market 17-Jul Netflix Inc – Q2 Earnings 
Pre-Market 17-Jul Abbot Laboratories – Q2 
After-Market 17-Jul IBM – Q2 Earnings 
After-Market 17-Jul eBay – Q2 Earnings 
After-Market 18-Jul Microsoft – Q4 Earnings 
Pre-Market 18-Jul Philip Morris Inc. – Q2 Earnings 
Pre-Market 18-Jul Morgan Stanley – Q2 Earnings 
Pre-Market 19-Jul BlackRock Inc – Q2 Earnings 
Pre-Market 19-Jul American Express – Q2 Earnings 
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