The volatility throughout the fourth quarter and December was enough to rattle the nerves of most investors. And a large sell-off right at the start of 2019 spooked investors further, at least before the Dow Jones industrial average posted a multiday recovery that took the index up about 1,250 points from its lows. While investors might have blamed machine trading and algorithms for the selling pressure in December, this was during a period when most people didn’t want to buy stocks. And it was a time when economic numbers and corporate news were looking less and less grand each week.
Now the investing community is preparing for waves of corporate earnings reports for the fourth quarter of 2018. Some companies are likely to post stellar earnings compared with the December quarter estimates, but where things are looking rather shaky is what to expect for guidance for the first quarter and for all of 2019. It is this guidance that should be of concern here, because at the current time most international corporations have every single reason to be cautious and conservative. They have no idea if trade talks will really result in a grand bargain with China, no idea if the partial government shutdown will get resolved, no clue if Federal Reserve Chair Powell really will slow down on the rate hike game, and no idea if the economic picture will improve.
24/7 Wall St. has warned that the analyst community had not dialed down expectations enough for the current climate. This also means that the investing community was not dialed in enough with reality, even after the major volatility made for the worst December since the Great Depression of the 1930s. At the start of 2019, the model we use for tracking analyst forecasts was pointing to Dow 28,000 in 2019. That felt ludicrous considering the Dow was closer to 23,000. Wall Street analysts also were being more than complacent in how they rate each other with price targets that were in many cases way too high with 40% and 50% in implied upside.
Even as the markets had recovered handily in January, there are growing concerns from investors, analysts, economists and corporate managers that are sounding certain alarms ahead of the earnings onslaught that will start in just a few days time. There are also big issues that are company-specific and could add up to enough added pressure when all combined: Johnson & Johnson and talc-asbestos, PG&E bankruptcy woes, Sears going kaput, J.C. Penney closing yet more stores, Samsung guiding lower and so on.
Before we get into which earnings warnings are weighing on investor ambitions in 2019, note that CFRA (S&P Global) already has warned that fourth-quarter earnings will be the first quarter that growth begins to taper off after three consecutive quarters of 20% growth, and the firm notes that investors likely will focus on corporate outlooks, as guidance among S&P 500 companies has been more negative than positive. The firm expects results to be better than expectations but also expects more downward revisions to come as the earnings period unfolds.
American Airlines Group Inc. (NASDAQ: AAL) lowered its 2018 earnings forecast on January 10 as fourth-quarter domestic performance was short of expectations. This is the world’s largest airline carrier by annual sales, and the new adjusted earnings per share range of $4.40 to $4.60 was down from a prior forecast of $4.50 to $5.00. American Air’s total revenue per available seat mile also was forecast to be up roughly 1.5%, versus a prior forecast of 1.5% to 3.5%. Further confirmation for airline worries came from Delta Air Lines Inc. (NYSE: DAL), which said that its own airfare revenues were not as high as expected during the key holiday season.
Apple Inc. (NASDAQ: AAPL) had been touted by analysts as having weak iPhone sales before the holidays, but after the first trading day of 2019, Tim Cook dropped the bomb in a rare warning signaling that things were even worse than analysts had forecast. Instead of only seeing firms cutting price target and maintaining “Buy” ratings, there were actual downgrades this time around. While Apple’s woes look tied to iPhone worries and China growth slowing, the reality is that the Apple ecosystem of technology suppliers has in many cases been feeling the heat as well. If Wall Street is only willing to value Apple at less than 12 times expected 2019 earnings, that is not a ringing endorsement for the technology sector as a whole, considering that Apple had been the first company to ever reach the $1 trillion valuation mark before sliding in 2018.