The story this earnings season won’t be about falling corporate profits; it’ll be about recession fears.
The backdrop: Investors are looking for hints of an economic slowdown as companies begin reporting first quarter earnings. (Economists overwhelmingly predicted GDP growth would slow during the first 3 months of the year.)
Where it stands: As we’ve reported, the market isn't punishing companies as much as it typically does for less-than-stellar results.
- Analysts say earnings will fall 3.9% from their Q1 2018 level, yet the S&P has risen 13% in the year's first 3 months and more than 20% from its December low.
Why it matters: "Corporate profits have been the key driver of the stock market in the last 10 years," James Liu, founder of research firm Clearnomics, wrote in a recent note to clients. But the market has completely ignored predictions of declining earnings growth in the first quarter.
- There's been an acceptance that earnings growth was bound to decelerate this year after getting a boost from the tax cut in 2018.
- Profits aren't falling because of declining sales, but margins are shrinking thanks to higher labor and material costs.
The big picture: For first time in a decade, U.S. companies are expected to report lower profits, but also report higher revenue, Reuters reports.
Be smart: Nick Raich, founder of research firm Earnings Scout, tells CNBC "the market could be very sensitive to macro events like tariffs or slower global growth," rather than falling earnings.
- We've seen investors react to how companies are talking about a potential recession, for fear that signals — like the yield curve inversion, a potentially less-hot labor market and slowing growth around the world — are also showing up on executives' radars.
- One example: Shares of JP Morgan fell 1.7% when CFO Marianne Lake said that "recessionary indicators ... are not flashing red, but they are off the floor" in February, as Reuters points out.
What to watch: JP Morgan and Wells Fargo will field questions from analysts later this morning, after reporting earnings.
- In a press release alongside its earnings announcement, JP Morgan CEO Jamie Dimon reiterated his confidence in the economy, despite global geopolitical uncertainty.
Go deeper: Investors aren't punishing companies for bad guidance
