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Quarterly Earnings Likely to Contract as Expected

15 October 2019USEquities
  • As the Q3 earnings season kicks off in the US, Citi analysts expect to see the first year-over-year decline in earnings since 2016, likely a drop of 1-2%, which is still more optimistic than current consensus estimates for a 3-5% contraction. Corporate earnings reports may also see downgrades to FY2020 guidance and an overall muted sentiment from executives.
  • Looking ahead, Citi analysts think that 2020 consensus earnings estimates remain too high given the economic backdrop. Bottom-up estimates for over 10% growth next year appear too rosy. In contrast, Citi analysts currently forecast 4% growth for both US and global earnings in 2020. The Q3 earnings season could jumpstart more meaningful downgrades, as firms begin to provide clearer guidance around next year's profit growth prospects.
  • Although the Q3 earnings season tends to coincide with consensus downgrades to S&P 500 profit estimates, these downgrades do not necessarily prevent further share price gains. In fact, Q3 tends to be the strongest of the four earnings seasons for S&P 500 returns.

    Quarterly Earnings Likely to Contract as Expected
    Past performance is no guarantee of future results, real results may vary. Forecasts are expressions of opinion, are not a guarantee of future results and are subject to change.
  • While there has been concern over a fragile global demand environment and uncertainty around US trade policy, the American consumer remains consistently healthy, benefiting from low unemployment, steadily rising wages and falling mortgage rates.
  • Nonetheless, Citi analysts note that late cycle investing tends to come with elevated volatility. Late cycle equity returns are among the strongest of any phase of the cycle (recovery, mid-cycle, late cycle, contraction), but rising volatility makes staying invested more challenging. As a portfolio hedge, investors could consider gold. While it may see price declines under risk-on scenarios, it is negatively correlated with equities.

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