The first-quarter earnings season is shaping up to be a solid one for US companies heavily exposed to the American economy.
But the more companies rely on demand outside the US, the murkier the outlook. A stronger US dollar, continued trade tensions with China and a broader global slowdown are all expected to weigh on profits, according to estimates from Wall Street analysts tallied by FactSet, a data company.
Companies with more than 50 per cent of sales coming from the US are expected to see a year-on-year increase in earnings of 1 per cent in the first quarter, according to FactSet. But for companies with less than half of their sales in the US, earnings are expected to drop by 11.2 per cent.
The contrast reflects slowing growth around the globe. Chinese trade data last week came in below expectations, while the European Central Bank downgraded its expectations for growth in 2019 from 1.7 per cent to just 1.1 per cent. The US, meanwhile, grew at a healthy clip of 2.9 per cent in 2018, up from 2.2 per cent the year before.
“I think perhaps . . . the investment universe might have underestimated the impact of the trade war as well as the Chinese and European slowdowns,” said Rebecca Patterson, chief investment officer at Bessemer Trust in New York.
The weakening data has contributed to large cuts to analysts’ profit forecasts, with a downward revision of 6.6 per cent in the median earnings-per-share estimate for S&P 500 companies since the end of last year. That slippage in estimates is significantly higher than long-term averages.
“The bar has been set very low,” said Ben Laidler, global equity strategist at HSBC. “There is always a sense of lowering the bar to then jump over it but the revisions have been much more apparent this quarter.”
Overall, earnings for S&P 500 companies are set to fall by 3.4 per cent, according to FactSet.
“The global expansion is continuing to lose steam, and faster than anticipated a few months ago,” said Laurence Boone, the OECD’s chief economist, earlier this month.