Companies scale back forecasts, risking new dent to market after
quarter's rough start
By Gunjan Banerji
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 7, 2019).
The outlook for third-quarter corporate profits is darkening, a
threat to further derail a stock market that is already off to the
worst start to a quarter since 2016.
A flurry of earnings reports in coming weeks will mark the
latest test for stocks after a rocky stretch of economic data
exacerbated worries that a global manufacturing slowdown is
trickling into the U.S.
Jitters about the economy have pushed the S&P 500 down 0.8%
to start the fourth quarter, its weakest performance to start a
quarter since January 2016. The index is up 18% for 2019 but is
nearly flat for the previous 12 months -- a period that includes
last fall's brutal selloff and this year's bounceback.
Investors expecting a strong earnings season to propel stocks
out of this malaise could be in for disappointment.
Dozens of companies have tried to temper investor expectations
ahead of coming reports, saying earnings will come in lower than
analysts had expected, according to FactSet. Wynn Resorts Ltd.,
Macy's Inc. and Tyson Foods Inc. are among the companies that have
moderated expectations recently.
Analysts expect earnings for companies in the S&P 500 to
fall about 4% for the third quarter, according to FactSet data, in
what would mark the biggest year-over-year drop since 2016. In
recent months, Wall Street analysts have lowered their earnings
expectations for all 11 sectors in the S&P 500, from energy to
technology.
"If I had to tattoo something on my arm, it would be 'stocks
chase earnings,'" said Mike Bailey, director of research at FBB
Capital Partners. "We're a little more cautious than we were even a
couple weeks ago."
Data last week showed domestic factory activity hit a 10-year
low in September, while the services sector expanded at the slowest
pace in three years. Friday's jobs report eased some of those
fears, showing that the U.S. labor market is a relative bright
spot, with unemployment hitting a 50-year low.
A gloomy economic outlook isn't the only headwind for big
corporations. The U.S. dollar has rallied this year, potentially
making it more difficult for companies with large international
businesses to profit from shoppers abroad. Also in the mix is a
prolonged trade conflict with China and worries over how it might
dent an already slowing U.S. economy.
Mr. Bailey said he has been looking to buy shares of companies
that could fare better in an economic downturn, while unloading
exposure to those that could be caught in the trade war between the
U.S. and China, like Microchip Technology Inc.
Although trade tensions have lately taken a back seat to other
growth concerns, investors are watching for signs of their impact
on businesses. The term "tariff" was mentioned on earnings calls
more frequently in the second quarter than in the first, according
to FactSet, a trend that could continue. U.S. leaders are set to
resume talks with their Chinese counterparts this coming week.
Wynn Resorts warned last month that it expects profits for July
and August to be weaker than last year. Its Macau casino business
has been hurt by "a variety of factors in the region, including the
continuing trade dispute between the U.S. and China and disruptions
in Hong Kong," according to a company disclosure.
Lighting-products maker Acuity Brands Inc. said Wednesday that
sales volumes fell 16% in its latest quarter. Chief Executive
Vernon Nagel pointed to "a number of market shocks, including the
addition of significant tariffs placed on Chinese-made components
and finished goods, uncertainty created by the threat of further
trade actions and labor shortages in key markets" on the company's
earnings call. Shares slumped 11%, one of their biggest single-day
drops of the past decade.
Among the companies set to report results this week are Levi
Strauss & Co., Domino's Pizza Inc. and Delta Air Lines Inc.
Earnings season ramps up in earnest Oct. 15 with reports from
JPMorgan Chase & Co., Citigroup Inc., Johnson & Johnson and
United Airlines Holdings Inc., among others.
"The environment with the trade war has become much, much less
certain," said Chris Dillon, a capital markets investment
specialist at T. Rowe Price's multi-asset division, which oversees
$330 billion. "That easy lift of getting 19% annualized from the
S&P 500 is gone."
Particularly worrying is the number of tech executives saying
that earnings could take a hit. A record number of tech companies
are on track to issue negative guidance for the third quarter,
according to FactSet, potentially weighing on a key driver of the
market's gains.
It is common for earnings to come in better than expected
because analysts tend to be conservative with their estimates.
After this quarter's potential fall, analysts are projecting growth
to rebound later this year and through the middle of next year,
according to FactSet.
The coming earnings season could further distinguish the trade
war's relative winners from its losers, analysts said. For example,
Nike Inc. executives said revenue is expected to grow this year
after its sales beat expectations for its latest quarter, sending
its shares to a record in September.
Amy Kong, managing director at Fiduciary Trust Company
International, said she has taken profits in certain sectors and
companies that have performed well and expects a continued
divergence between different stock groups. "We're positioning
portfolios to be ready for more volatility," said Ms. Kong. "We are
building cash positions."
Some investors and analysts said they don't expect to see a
continuation of the strong economic growth recorded in recent
years, but they aren't positioning for a recession, either. They
will be closely parsing the latest data on consumer sentiment and
inflation due this week, which could stoke moves across bond and
stock markets. Additionally, Federal Reserve Chairman Jerome Powell
and regional presidents Charles Evans and Neel Kashkari are
scheduled to speak.
Further cuts from the Federal Reserve could help buoy markets,
several investors said. The growing concerns about the global
economy have coincided with rising bets of further interest-rate
cuts from the Fed. Investors are positioning for up to two more
rate cuts through December.
An accommodative Fed has been a primary driver of major indexes'
gains this year. The central bank lowered rates for the first time
since the financial crisis in July and followed up with another cut
in September.
"It could be a lot worse," Mr. Dillon said.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
October 07, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Wynn Resorts (NASDAQ:WYNN)
Historical Stock Chart
From Apr 2024 to May 2024
Wynn Resorts (NASDAQ:WYNN)
Historical Stock Chart
From May 2023 to May 2024