Earnings Point to a Possible Stock Market Crash in 2019
Don’t rule out a stock market crash in 2019 just yet. What we saw in December 2018 could just be the preview for what’s ahead.
Since the beginning of 2019, we have seen some buyers come in, making for a lot of the “buy the dip” mentality coming in. What’s more, mainstream stock pickers are saying “buy everything” once again.
It can’t be stressed enough: don’t get too complacent.
Let’s begin by asking one question: Why do we get a stock market crash or a bull market?
Earnings are hands down one of the most critical factors in markets moving higher or lower. If earnings are bad and expected to get worse, a stock market crash follows. In contrast, if earnings are good and expected to get better, you get a rally.
As it stands, earnings are starting to look weak. We are still in the midst of earnings season for the fourth quarter of 2018, and it looks like things are turning for the worst.
As of January 25, just 22% of S&P 500 companies have reported earnings for the fourth quarter of 2018. So far, earnings growth rate is around 10.9%. At the end of 2018, analysts and strategists forecasted a growth rate of 22.2%. (Source: “Earnings Insight,” FactSet Research Systems Inc., January 25, 2019.)
Here’s the thing: we are hearing a lot more negative earnings guidance as well. So far, for the first quarter of 2019, 15 companies have issued negative guidance, while only one company has issued positive guidance. That’s scary.
So, what are analysts predicting?
Well, for the first quarter of 2019, analysts expect S&P 500 companies to report earnings growth of 0.7%. For the second quarter, the earnings growth is expected to be 2.4%. The growth rate is 3.1% for the third quarter and 11.1% in the fourth quarter.
For the entire year of 2019, analysts are expecting an earnings growth rate of 6.3%
Assuming an earnings growth rate of 10.9% in the fourth quarter of 2018, in every quarter of last year, S&P 500 earnings grew by double digits. What’s more, the estimates we see for 2019 may be too optimistic and way too early, meaning they could get revised lower.
Don’t Ignore the Global Economy
There are risks that could hurt earnings.
One of the biggest is the global economy. It’s becoming very evident that global economic health is deteriorating. Even the Federal Reserve is starting to believe this could be the case.
Keep in mind that S&P 500 companies generate a lot of revenue from outside of the U.S. In 2017, 43.6% of the revenue of S&P 500 companies was obtained internationally. (Source: “S&P 500 Global Sales,” S&P Dow Jones Indices, last accessed January 31, 2019.)
Should the global economy slow, $0.43 of every $1.00 of sales at S&P 500 companies could be impacted, which could hurt their earnings too.
Given how earnings are looking and where they could go, I can’t be too bullish on the stock market. We may see indices move a little higher in the short term, but the long-term outlook looks dismal at the very best.
I will end with what I said earlier: don’t get too complacent. More selling could be ahead in 2019.