Tepid global economic data has triggered a razor-sharp focus among investors on corporate guidance. Economic reports in emerging and developed markets have been broadly below expectations, causing Citigroup economic surprise indexes in the two groups to fall to near their lowest levels since June. That the Citi gauges are negative suggests data in aggregate are missing economic expectations.
Lukewarm figures from China and Europe, along with a sudden drop in an index of U.S. manufacturing activity, have also spooked investors. Then last week, the World Bank cut its forecasts for global growth in 2019 and 2020.
The string of negative reports is heightening worries that weaker economies around the world will dent demand for U.S. goods and services. Still fresh on investors’ minds is a surprise cut by Apple Inc. on Jan. 2 to its quarterly revenue guidance, a move prompted by a downturn in iPhones sales in China. Other companies, ranging from technology, industrial to retail firms, have issued similar warnings.
According to Wall Street estimates, profits at S&P 500 companies during the fourth quarter rose 11% from a year earlier. While that is down from the 25% earnings growth in each of the first three quarters of 2018, analysts say an 11% bump is still enough to support gains in the stock market.
But investors have become eager for clues on how the U.S.-China trade fight is affecting companies. That is especially after more tariffs took effect last quarter, potentially hurting corporate earnings and growth prospects. In addition to the biggest banks, Netflix Inc., UnitedHealth Group Inc., airline operators Delta Air Lines Inc. and United Continental Holdings Inc. are among the biggest names scheduled to post results this week.
“I do expect some caution in the calls from management,” said Nancy Perez, senior portfolio manager at Boston Private. “The question is, ‘How prevalent is it going to be?’”
Cheaper valuations, resulting from last quarter’s tumble in shares, could also lead to counterintuitive moves following earnings reports, analysts say. Some beaten-down companies that cut forecasts have actually seen their stocks rise after, partly because of the lower valuations, and in some cases, because the news wasn’t as bad as some investors had been bracing for.
One example last week was Apple supplier Skyworks Solutions Inc. Shares rose 3.8% Wednesday after the semiconductor maker lowered its quarterly sales and profit targets. They had tumbled 11% the day after the Apple news.
Investor reactions to earnings in the previous quarter were also mixed. Many stocks that topped expectations still fell, as valuations were loftier then. S&P 500 companies that reported stronger-than-expected earnings in the third quarter rose on average 0.1% between the two days before the earnings report and the two days following it, according to FactSet.
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Meanwhile, those companies that missed estimates were punished more severely than in the past, with shares dropping 3.1% on average over the four-day period, compared with the five-year average of 2.5%.