Corporate earnings season is the roughly six-week period when the majority of U.S. corporations release their financial results for the prior quarter. In most cases, this will be the January-March first quarter. Each company’s earnings (profits), sales and revenues, among other data, will be painstakingly dissected by the markets to justify the current price of the company’s stock.
There is no official “start date” to the earnings season, and a small number of companies have already reported their results. Traditionally, the season formally kicks into high gear with the earnings of the financial industry. This was on Friday, when financial bellwethers JPMorgan Chase, Wells Fargo and PNC Financial Services Group announced their results. During the next few weeks, the rest of America’s corporate heavyweights will release their quarterly earnings.
Compared to recent quarters, expectations for the first quarter results have been tempered. In last year’s third quarter, corporate earnings grew by an impressive 28.4 percent over the prior year. In the fourth quarter, earnings growth was 16.9 percent. For this first quarter, however, earnings are expected to have actually declined by 2.1 percent.
Corporate earnings often reflect the underlying economic environment. But ongoing concerns on the health of the U.S. and the broader global economy have raised caution flags for this latest round of corporate earnings.
Domestically, U.S. economic growth last year declined from 4.2 percent in the second quarter to 2.2 percent in the fourth quarter. For the first quarter of 2019, the Federal Reserve is projecting a growth rate of just 2.1 percent. America’s tariffs, which are essentially taxes, on imported raw materials and component parts also increase costs of production and manufacturing.
Internationally, concerns of a weakening global economy continue. On Tuesday, the International Monetary Fund further slashed its 2019 global economic growth forecast to just 3.3 percent. This would be the slowest pace of growth since 2009, the height of the global financial crisis.
Consequently, the markets have set the bar rather low for the first quarter earnings season. And therein lies the risk. The markets won’t grant much leniency for disappointing results, and failure to meet these modest expectations could drive further chaos in the stock markets.
The Dow Jones Industrial Average (DJIA) is still recovering from its 2018 year-end decline of 5,036 points, or almost 19 percent. Since then, the DJIA has rallied, recovering 4,364 points as of Thursday’s close. But a disappointing earnings season could shake confidence in this current rally and its sustainability. Adding to the potential earnings season volatility will be each company’s forward guidance — its projected outlook for the next quarter and the rest of the year.
For corporate America, the current backdrop of weakening U.S. and global economic growth, along with America’s ongoing trade disputes, brings uncertainties. And much of this uncertainty will be conveyed by corporations in this current earnings season. Unfortunately for stock investors, uncertainty is one thing the markets don’t like.