Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Market View

Slower growth in corporate profits may not be indicative of a pending recession.

 

In Brief:

  • Fourth quarter 2018 U.S. corporate earnings growth and quarterly earnings growth throughout 2019 are expected to come in below the elevated levels of prior quarters.
  • In our view, the decline will reflect company cost pressures, an overall slowdown in global economies and, with respect to 2019 expectations, the impact of tax reform on 2018 earnings.   
  • If the deceleration of earnings does continue and the market enters an earnings recession, we believe it is not necessarily indicative of a broader economic recession.

 

With 89% of companies in the S&P 500® Index reporting fourth quarter 2018 earnings as of February 22, 2019, 69% have posted earnings per share (EPS) above estimates, but below the five-year EPS average, according to FactSet. The blended earnings growth rate, which combines actual results for companies that have reported and estimated results for companies that have yet to report, is 13.1% to date. If 13.1% turns out to be the actual growth rate for the period, it would mark the fifth straight quarter of double-digit earnings growth, but it would also represent the first time since the fourth quarter of 2017 that earnings growth has been below 20%. This slowdown in estimated growth is primarily reflective of tariffs arising from U.S.-China trade disputes and an overall softening in global economies.

2019 Earnings
Looking to 2019, the EPS growth consensus is projecting negative growth in the first quarter, although turning positive for the balance of the year.

 

Chart 1. EPS Growth Estimates for 2019 Appear to Call for a Recovery from a Negative First Quarter
Percent change, S&P 500® Index quarterly EPS growth, 2015-2019 (estimate)

Source: FactSet. Data as of February 22, 2019.  *Estimated. Past performance is not a reliable indicator or a guarantee of future results.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. 
Indexes are unmanaged, do not reflect deduction of fees and expenses and are not available for direct investment.

 

Additionally, the estimated net profit margin for the S&P 500 Index for the first quarter 2019 is 10.8%, as reported by FactSet. If the reported net profit margin aligns with the estimated figure, the S&P 500 Index will experience its first year-over-year decline in net profit margin since the fourth quarter of 2016.  

 

Chart 2. Estimated Net Profit Margins for First Quarter 2019 are Lower
S&P 500® Index net profit margins, first quarter 2015–first quarter 2019 (estimate)

Source: FactSet. As of February 22, 2019.
Past performance is not a reliable indicator or a guarantee of future results.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. 
Indexes are unmanaged, do not reflect deduction of fees and expenses and are not available for direct investment.

 

Behind the Expected Slowdown in Earnings Growth
The slowdown in the estimated growth rate in upcoming quarters is, in part, related to the time frame in which comparisons are made. The tax reform legislation passed in late 2017 had an extraordinary impact on EPS growth in 2018. In fact, the lower corporate tax rates contributed nearly half of the EPS growth in the S&P 500 over the past year, according to Goldman Sachs. Therefore, much of the slowdown can be attributed to the dissipation of this transitory event.

Beyond the tax reform, Apple, Inc. recently issued negative revenue guidance for the first quarter of 2019, citing China’s impact on profits and the headwinds from the U.S.-China trade conflict. The multinational technology company accounted for over 4% of S&P 500 net income last year, according to The Wall Street Journal. Therefore, any changes in estimates will be magnified at the aggregated index level.

As seen with Apple, the escalating trade tensions between the United States and China are expected to weigh on profits through 2019. Bank of America anticipates that one-third of the decline in 2019 earnings forecasts can be attributed to the impact of bilateral tariffs imposed by the two economic superpowers.

Not a Cause for Concern
While EPS growth is expected to be slightly negative in the first quarter of 2019, as mentioned above, some perspective is in order as the actual earnings figure (i.e., not growth rate) is comparable to the robust reading in the first quarter of last year.

Additionally, while tariffs have upended markets globally, President Trump recently announced that he would delay a threat to raise such levies after “productive” talks with Chinese representatives. A new deadline has not been set. It is clear to us, however, that there has been substantial progress in bilateral talks and the issue of tariffs may not persist over the long term.

Lastly, it is worth noting that year-over-year average EPS growth from 2009 through 2018 was 9.04%, as seen in Chart 3. As mentioned previously, the blended earnings growth rate for the fourth quarter of 2018 is 13.1%, which is well above the long-term average of the current bull market that began in 2009. While a drop in EPS growth rates is a concern for many investors, note that during this period of 9% growth in earnings, notably lower than recent quarters, the S&P 500 returned a cumulative 243.03%, or 13.12% on an annualized basis. Moreover, the estimated year-over-year earnings growth for 2020 and 2021 are more than 11%, according to FactSet, further supporting the notion that the deceleration in earnings may, in fact, be a reversion to the mean.

 

Chart 3. Year-Over-Year EPS Growth from 2009-2018 Averaged More Than 9%
Year-over-year EPS growth in the S&P 500® Index, calendar years 2009–2018

Source: S&P Dow Jones Indices. As of February 22, 2019.
Past performance is not a reliable indicator or a guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect deduction of fees and expenses and are not available for direct investment.

 

Economic Recession Versus Earnings Recession
Faced with a decline in the earnings growth rate, some observers are suggesting that this is evidence of an impending economic recession.

But a profit slowdown does not suggest an economic recession necessarily. In fact, the historical correlation between earnings recessions (commonly defined as two consecutive quarters during which the S&P 500 Index earnings decline year over year) and economic recessions is not strong; 13 of the 22 S&P 500 Index earnings recessions were not followed by an economic recession within two years.

While factors such as cheaper oil in the energy sector and higher labor costs do weigh on profits, their impact on the bottom line is mixed. For example, cheaper oil and higher wages should support an increase in consumption and, in turn, revenues for many companies.

Summing Up
We believe that the muted earnings projections for the first half of 2019 stem, in large part, from a confluence of both non-recurring and transitory events including unstable U.S.-China trade relations and tax reform that has bolstered earnings in recent quarters to unsustainable levels. Despite the decline in growth rates, however, the absolute level of earnings is still robust, and that is not a factor one would expect to see in the months leading up to recession. Finally, U.S. business fundamentals are still strong, and the bull market that started in 2009 came on the back of growth rates lower than what is anticipated for the fourth quarter 2018, suggesting a reversion to the mean in earnings growth may still translate to good things for stock prices.

While macro issues undoubtedly have had a significant impact on the market, we believe there is still a clear advantage for active managers with the ability to pick the right stocks in this environment.

 

IMPORTANT INFORMATION
The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. No investing strategy can overcome all market volatility or guarantee future results. Market forecasts and projections are based on current market conditions and are subject to change without notice. Due to market volatility, the market may not perform in a similar manner in the future. No investing strategy can overcome all market volatility or guarantee future results.

Glossary

Earnings per share (EPS) is the portion of a company’s profit allocated to each share of common stock.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

MARKET VIEW PDF


  Market View

Contributor
 

Coffin_Melanie_027_Website

Melanie Coffin
Product Consultant 

Contributor
 

Ancrum_Tarik_024_Website

Tarik Ancrum
Product Consultant

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field