Key Points

  • Earnings and the beat rate for 4Q18 continue their strong stretch; but the “math” gets trickier this year as the year-over-year boost from corporate tax cuts fades.

  • Lowered guidance could be setting the bar sufficiently low this quarter for companies to be able to scale—typically a bullish set up for stocks.

  • However, if earnings head into a recession, last year’s drawdown may not have been sufficient to price in those lower expectations (especially if an economic recession is near).

Given that we are about two-thirds of the way through fourth quarter 2018 earnings reporting season I thought it was time for an update. In keeping with one of my overall themes over the past year that trends matter at least as much as levels, the possible coming inflection point from strongly positive earnings growth in 2018, to much weaker (and even possibly negative) results this year is worth further analysis.

First, let’s take a look at the fourth quarter 2018 (4Q18) results for the S&P 500 so far this season. As of Friday’s close, earnings growth is expected to be 16.5% for the fourth quarter; which is a blend of the 67% of already-reported earnings and the 33% of estimates for those not-yet reported. The “beat rate” relative to consensus so far is 71%, with 7% matching and 22% coming in below estimates. As you’ll see in the two charts below, the energy sector accounts for the largest contribution to fourth quarter earnings growth, with utilities the only sector showing earnings deterioration. From a beat rate perspective, Communication Services, Technology, Health Care and Industrials top the list, with utilities bringing up the rear.

4Q Earnings Growth/Beat Rate by Sector

Source: Charles Schwab, I/B/E/S data from Refinitiv, as of February 8, 2019.