Profits May Head South as Revenues Go North
With higher revenues generally come higher profits, right? Maybe not this quarterly earnings season.
Reuters reported that for the first time since the third quarter of 2008, large companies reporting for the three-month period that ended March 31 may generally come in with lower profits on higher revenues. Citing data from Refinitiv, Reuters reported that analysts see profit margins shrinking by 1.1 percentage points, the first year-over-year decline in at least two years.
Further, Reuters reported that Q1 earnings for S&P 500 companies are expected to fall 2.5% from a year earlier, representing the first quarterly U.S. decline since 2016. Revenue is projected to increase 4.8% Y-O-Y.
For individual sectors within the S&P 500, the earnings shortfall may be steeper. Tech companies within the S&P 500 have outperformed the broader market in 2019, but are expected to average a 6.1% Y-O-Y decline in Q1 revenues, while the energy sector is expected to see a 21.2% drop.
The perception of a slump may be due partly to an apples-and-oranges comparison with Q1 2018. A year ago, profits were up 20% on the near-term lift from Congress’ overhaul of the U.S. tax code.
However, it’s not strictly a case of comparisons with unusually robust profits in the year-ago period. Increasing expenses this year may also be eroding margins.
“Companies are experiencing rising input costs, as well as increases in labor costs from modestly rising wages,” Invesco’s Kristina Hooper told Reuters. The impact of tariffs is one factor in the rising costs, Reuters reported.
Analysts are divided on the longer-term outlook for company earnings. At Morgan Stanley, equity strategist Michael Wilson told Reuters that Q1 results are likely to mark the start of an S&P 500 profit recession, defined as two consecutive quarters of earnings declines.
“Our earnings growth leading indicator suggests [Q1] won’t be the trough for this year,” Wilson wrote in a note.
Conversely, Credit Suisse Securities’ Jonathan Golub believes that projected sales growth through the balance of 2019 may also help investors look past any Q1 margin dips, according to Reuters. “Revenue growth has been extremely stable throughout 2018 and is expected to remain so in the year ahead,” Golub wrote in a note to clients last week. “We believe that investors will focus on the breadth and consistency of top-line results, versus [Q1] margin pressures.”
For comments, questions or concerns, please contact Paul Bubny
- ◦Economy
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