Chart of the week: a lower bar for earnings

 

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Source: Refinitiv Datastream, I/B/E/S, Aberdeen Standard Investments (as of 9 April 2019)

First-quarter earnings season is upon us, which means all eyes are on the announcements of US corporate profits compared to the expectations of financial analysts. Relative to earnings in the first three months of 2018, profits by major US companies are expected to be about 2-3% lower. On an annual basis, growth is now forecast to be about 3.5% in 2019, compared to projections of around 10% at the end of last year.

On the whole, we expect economic growth to be slower this year compared to 2018. But while growth is slowing, there is no need for investors to raise the alarm bell yet. Analysts typically begin every year with bullish predictions of around 10% growth and revise down as the year progresses. Last year was an exception, thanks to the Trump administration’s tax reform, which fuelled anomalously higher profits. Furthermore, a lot of weak sentiment is baked into this year’s forecasts following the cautious outlook statements issued by corporates at the start of the year. Unless there is an unanticipated rise in labour costs or a shock to revenues, then profit growth should beat analysts’ expectations.

Despite lowered growth expectations, US companies remain global profitability leaders. They continue to generate significantly higher net-profit margins than their Japanese or European counterparts. In short, a lower bar for this quarter’s earnings should not be interpreted as the death knell of US corporate profitability for investors.

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