First quarter earnings season begins this week with some big banks reporting on Friday. While we think profit growth will finish around flat overall, an improving macro backdrop points to better growth ahead.
We previewed the earnings season in this week’s Weekly Market Commentary, highlighting key themes including the low bar, expected narrowing of profit margins, trade uncertainty, and currency drag.
We also highlighted a few important sectors to watch. As shown in the LPL Chart of the Day, energy sector earnings may fall more than 20% year over year for the quarter after more than doubling last year. Oil prices traded well below year-ago levels.
To us, consensus estimates, which are calling for a double-digit percentage drop in technology sector earnings, is even more surprising—IT hardware (including Apple) and semiconductor companies are expected to experience outsized declines. Combined, nearly 70% of the expected 4.6% dip in S&P 500 earnings is being driven by these two sectors.
On the bright side, healthcare earnings are expected to rise nearly 4%. Within the sector, biotech, healthcare providers and services, and life sciences tools and services will likely post the biggest earnings gains. Utilities and real estate earnings are also expected to rise.
The industrials and communication services sectors could join the earnings growth party as well if we see typical above-estimate growth in both sectors. Flat may be a stretch for financials’ and consumer staples’ earnings, with 4–5% declines reflected in current estimates.
Looking beyond the first quarter, the earnings picture should brighten.
”We expect the S&P 500 to generate mid-single-digit earnings growth in 2019 after a trough in growth in the first quarter,” said LPL Chief Investment Strategist John Lynch. “Though economic growth is likely to slow from last year’s pace, we see sufficient growth ahead to drive another year of record profits, supported by fiscal stimulus, robust manufacturing output, healthy labor markets, and resolution of the U.S.-China trade dispute.”