For the past two-and-a-half months, concerns over surging inflation, interest rate hikes and the back-and-forth threats of tariff disputes have driven the stock market chaos. Though these concerns have yet to fully materialize, their very threat has sent the stock markets reeling on a single common principal – their projected impact on corporate earnings.
Corporate earnings — a company’s profitability — is a key indicator of its financial health and is reflected in the price of its stock. In the next few days, the first quarter corporate earnings season will kick into high gear.
The corporate earnings season is the period of time, typically lasting a few weeks, that publicly traded companies release their financial results from the prior quarter. Earnings, sales and revenues, as well as estimates on future revenue growth, are dissected and absorbed by the markets to justify the current price of the company’s stock.
Expectations for the first quarter’s earnings season are high, as the markets confront the largest correction of stock prices in years. According to market research firm FactSet, in the first quarter, earnings for companies in the S&P 500 are expected to have increased by 17.1 percent from the prior year, the fastest rate of growth since the first quarter of 2011. Revenues are expected to have increased by 7.3 percent. Energy, materials (metals & mining, chemicals), information technology and financials are those sectors expected to report the largest growth in earnings.
Much of the high expectations are fueled by the recent success reported in the fourth quarter, where 77 percent of all S&P 500 companies recorded actual revenues greater than initial expectations — the highest percent since 2008. In the fourth quarter, S&P 500 companies reported a collective earnings growth of 14.8 percent and revenue growth of 8.2 percent over the prior year.
A successful earnings season would be a welcome reprieve from the recent market chaos. As of Wednesday, the Dow Jones Industrial average closed at 24,189.45, a few hundred points below its start on January 1, but well below its 2018 high of 26,616.71 reached on January 26. It would also reinforce the fundamental strength of the stock market and its underlying foundation of solid economic growth.
The first quarter also marks the implementation of the corporate tax cuts, passed by President Trump on December 22 which went into effect on January 1. The corporate tax rate was reduced from 35 percent to 21 percent and provides incentives for companies to repatriate their overseas earnings back to the U.S.
The risk, of course, is a disappointing earnings season, which would further complicate a still-fragile stock market struggling to assess the continued uncertainties of inflation, interest rate hikes and tariff disputes. Given the volatility of stock prices in recent months, the markets could certainly use a shot of positive momentum and boost of assurance.
For the few companies that have already reported their first quarter earnings, results have been positive. But the corporate heavyweights such as JPMorgan, Exxon Mobil, AT&T and DowDuPont, among others, will truly set the tone in the following days and weeks.