Wall Street Week Ahead: Profit Estimates May Be Adding In Too Much Cost Risk

www.oann.com | 2/13/2019 | Staff
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NEW YORK (Reuters) – As Wall Street braces for the first quarterly decline in earnings in nearly three years, some investors are wondering if the market is factoring in a bigger erosion in profit margins than will actually come to pass.

Forecasts for U.S. earnings, after a big boost from corporate tax cuts in 2018, are falling sharply in 2019. But revenue forecasts remain relatively robust, leaving an expected spike in costs as the main reason for profitability to weaken.

Strategists - Evidence - Cost - Pressures - Margins

But some strategists say there is little evidence yet of such cost pressures and that margins may hold up better than expected.

“Companies since the 2008 trauma have made it a top priority to maintain and increase, if possible, their profit margins,” said Ed Yardeni, president and chief investment strategist of Yardeni Research.

Labor - Compensation - Costs - Margins - Increase

“We don’t expect that labor compensation and other costs will squeeze margins. Nor do we expect that an increase in those costs will boost prices,” he added. “Rather, we are betting on improving productivity.”

Besides the tightening labor market, the trade war between the United States and China and the stronger U.S. dollar are among the biggest potential risks to corporate margins this year.

Quarter - Analysts - S - P - Earnings

For the first quarter, analysts are forecasting a year-over-year S&P 500 earnings decline of 0.5 percent, according to IBES data from Refinitiv. Second-quarter earnings are still expected to grow 3.5 percent, though that estimate also is down sharply from the start of the year.

The drop in forecasts has led to talk of a profit recession, defined as at least two consecutive quarters of year-over-year earnings declines. The last U.S. profit recession ran from July 2015 through June of 2016.

Revenue - S - P - Companies - Revenue

Projected revenue for S&P 500 companies has been more resilient, with first-quarter revenue growth estimated at...
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