Patrik Schowitz

Macroscope | Markets should expect companies to lower growth expectations – and then to beat them

Patrik Schowitz says if investors are looking for something to bank on amid market chaos, they should take the projected profit growth coming out of US companies, then add 3 to 4 percentage points

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Traders work on the floor of the New York Stock Exchange on January 30. The ongoing revelations of companies’ fourth-quarter earnings can be expected to affect stocks and help investors and analysts prepare for the year ahead. Photo: Bloomberg

Patrik Schowitz

Published: 10:30am, 1 Feb 2019Updated: 10:30pm, 1 Feb 2019

Global markets have been gripped by uncertainty. First, there is politics: uncertainty around the US-China trade situation, over the state of the US political system just after the government shutdown, around the future of the European Union with Brexit and European parliament elections looming, as well as over continuing issues in EU member countries such as Italy and France. Then there is uncertainty around the global growth outlook, which has shown serious signs of slowing, partly due to the political uncertainty.

One opportunity to cut through the fog of uncertainty is the quarterly ritual of company reporting. Investors comb through companies’ statements for illuminating pieces of information on the state of things such as demand growth for company products or the impact of tariffs. Most attention is paid to US company results, given that they still account for over half of global equity market value. Reporting of fourth-quarter results by US companies is now in full swing, and should give some signs of how serious the current profit slowdown really is.

Analysts are currently predicting 14 per cent profit growth year-on-year, down from 20 per cent just a few months ago, but it is important to realise that cuts to forecasts are part of the ritual. Companies normally guide down analysts’ forecasts for the upcoming reporting season so they can then beat those forecasts. The question therefore becomes not whether forecasts are exceeded, but by how much.

Beating the forecast by 3 to 4 percentage points for the overall market is considered “normal” in the US, so we might expect something like 17 to 18 per cent growth. That would be a clear slowdown from the 20-25 per cent growth rate US companies achieved in first three quarters of 2018, turbo-charged by tax cuts and fiscal stimulus. Still, it would be a solid result, given that normal long-term profit growth in developed markets is closer to mid-single digits.

But markets look forward – and what they really want to know is how bad the profit slowdown will get in 2019, and whether we might even see them fall.

Current expectations are for global and US profit growth in 2019 at around 6-7 per cent. But these expectations, too, have been falling fast. Just three months ago, global equities as a whole were expected to increase profits by more than 11 per cent. As far as emerging market equities are concerned, things do not look much better – at the moment, analysts predict around 8 per cent profit growth for 2019 for the emerging market index as a whole, but within that it is actually the smaller Latin American region which is taking the lead, with an expectation of around 18 per cent growth.