BIG FLASHING WARNING SIGN
Contrary to the worst fears of many investors, fourth-quarter sales and profit results for the S&P 500 were pretty darn good.
That was last year, though…
Now it’s time to brace yourself for the 2019 profit slump.
With nearly all the S&P 500 companies having now reported Q4 2018 results, we can definitively say the numbers were better than expected.
Nearly 70% of companies reported positive profit surprises, and over 60% beat sales forecasts. Overall S&P earnings grew 13.1% in the three months ended December, while sales advanced 6.6%.
Solid Results, but There’s a Fly in the Ointment…
Seventy-three percent of S&P 500 companies gave negative guidance for first-quarter 2019 results. That’s above average when compared with recent years.
As a result, Wall Street analysts are taking the knife to S&P earnings estimates and slashing them for the current quarter, which ends March 31.
At present, analysts still see Q1 2019 sales growth of 5% for the S&P 500, but a year-over-year decline in profits of 2.7%. That’s quite a disconnect between corporate America’s top- and bottom-line results.
This suggests profit margins are under downward pressure.
This marks the first time in three years S&P profit margins have declined on a year-over-year basis.
And it’s the latest worry for those who fear a full-blown earnings recession.
Here Comes the Stock Slump
Profit margins dipped somewhat after the reported Q4 results, by 11.3%.
First-quarter margins are forecast to decline to just 10.8%, down from 11.6% in Q1 2018. In fact, 10 of the 11 S&P 500 sectors are projected to report declining profit margins year over year.
The biggest drop will be in the tech sector, with margins falling from 22.3% to 20.1%.
Twenty percent still looks like a healthy number to me, but investors dislike declines of any kind.
Utilities are the only sector forecast to report higher profit margins.
The last time this scenario played out, from 2015–16, stocks turned quite volatile amid the uncertainty. The S&P suffered back-to-back declines of 12% in the second half of 2015 and a 14.5% drawdown into early 2016.
But once profit margins started growing again in the second half of 2016, stocks zoomed 20% higher over the next 12 months.
If the profit slump of 2019 plays out similarly, brace yourself for more turbulent market conditions ahead.
Rather than the straight-up rally of the past two months, you can expect sharp up and down moves in the months to come. This places a premium on your stock selection. And here’s what to do to beat the volatility.
Stick with high-quality, dividend-paying stocks like the ones I’ve recommended here to weather the slump.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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