What to watch for in US fourth-quarter earnings season

Investors hope company profits, rather than the Fed, will drive stocks this year.

  • By Mamta Badkar and Richard Henderson,
  • Financial Times
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On Tuesday morning a trio of big banks kicks off the fourth-quarter earnings season in the US. Analysts and investors are hopeful that corporate America will report its first quarter of earnings growth since the end of 2018 and that profits, and not a flood of liquidity, will power Wall Street in 2020.

Last year the world’s biggest stock market notched its best annual gain since 2013, closing up 29 per cent, helped by three interest rate cuts over the course of the year from the US Federal Reserve. But valuations raced ahead of profits: over the course of the year the forward multiple of price/earnings rose from 14 times to 19 times. Multiple expansion accounted for 92 per cent of the market’s appreciation, according to Goldman Sachs.

Investors are hoping that the cheaper money now swilling around the system will begin to show up in companies’ income statements, said Jeff Kleintop, chief global investment strategist for Charles Schwab. “

Last year we saw a huge increase in valuations on the back of central bank support,” he said. “Now we’ve got to deliver on the promise.”

Here are four areas to focus on.

How healthy is the US consumer?

Strong retail spending and improving wages have not always translated into strong quarters for consumer-focused businesses and investors will look for winners and losers from this year’s holiday shopping season.

The consumer discretionary sector is expected to have a tough time of it, with earnings down 14 per cent from the same period a year earlier, according to FactSet’s aggregation of the average earnings-per-share estimates of all the constituents in the index.

However, it is not just brick-and-mortar department stores that struggled. Automaker General Motors, which had a 40-day strike at its US factories in the autumn, has warned of a more than $2bn hit to its fourth-quarter profits. Indeed, GM and Ford are two of the three biggest contributors to the decline in expected earnings for the sector. The third is Amazon, which continues to spend heavily to drive top-line growth. Excluding that trio, the fall in projected profits for the sector would narrow to 3.5 per cent.

“Consumer discretionary is going to be the wild card,” said Mike Thompson, managing director of model portfolios at Goldman Sachs Asset Management. “Does that improve or does that actually get worse? I think that is going to occupy a lot of . . . minds.”

Could energy be at an inflection point?

The oil and gas sector is expected to bring down the curtain on a grim 2019 with a 37 per cent drop in fourth-quarter EPS from a year earlier, according to FactSet. The sector has suffered in recent years from low gas and crude prices, exacerbated by abundant supplies of shale oil from the US. The outlook is brighter, though. Analysts expect a 22 per cent rise this calendar year, said FactSet.

“The expectation is we [see] a pick-up in the industrial data and with that we should see an acceleration in growth for those companies that are most exposed to the economy,” said Patrick Palfrey, strategist at Credit Suisse. Energy, materials and industrials are best placed to benefit, he added.

Tech woes could be over

The most heavily weighted sector of the S&P 500 is expected to report a slight drop in fourth-quarter EPS, of just under 2 per cent. Mr Palfrey noted that tech had a host of “idiosyncratic issues”, especially in hardware and semiconductors, as companies poured money into their businesses. That weighed on profits despite stronger revenues.

This year, as spending starts to fade, analysts expect growth of more than 9 per cent in EPS and about 4 per cent in revenues, well ahead of the 2.6 per cent of the broader market.

How bullish will bosses be?

Last year’s tone from the top was uncertain, as chief executives grappled with trade troubles and difficult comparisons with 2018, following the windfall from the US tax overhaul. Outlooks for the first three months of the new decade, as well as the full-year, now come into focus.

Investors should pay special attention to inflationary trends, said Jim Tierney, chief investment officer of AllianceBernstein’s concentrated US growth equities fund. Evidence of a pick-up in prices — in the form of rising costs for labour and raw materials — could force the Fed to take a more hawkish stance, and “should not be ignored”, he said.

Even so, FactSet forecasts are for corporate America to be revitalised this year, with aggregate earnings growth of 9.4 per cent for the S&P 500 (.SPX). That means that companies that miss the mark may not be given much sympathy.

“We are on the high wire now, from the perspective that valuations have gone up,” said Mr Tierney.

Companies that do not produce strong earnings growth will be “punished”, he added. “It’s your ‘come to Jesus’ moment, post fourth-quarter earnings.”

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