Concern over Apple’s sales comes after high-profile warnings from Alphabet and Amazon prompted investors to look past solid results from previous quarters. Goldman Sachs and Citigroup have warned about heightened market volatility as expectations came down.
October was the U.S. equity market’s worst month in seven years and coincided with a flurry of earnings downgrades. The expected rate of growth for S&P 500 income in the current quarter has fallen to 15 percent from 18 percent at the start of October, according to analyst estimates compiled by Bloomberg.
Expectations for next year are also weakening. For two weeks in a row, analysts trimmed their predictions. At $175.8 a share, the estimated profits have declined 0.7 percent from the peak in September, the biggest downward revision for the year.
Going by history, more downgrades may be on the way. Thanks to tax cuts, 2018 stands as an outlier, a year in which profits estimates have kept rising as it went on. That’s not what usually happens. Over the last 30 years, analysts have generally started way too optimistic and then cut annual forecasts as time went on -- by an average of 8 percent, data compiled by Goldman showed. Should 2019 track that pattern, EPS would erode to $161.70 -- not the $175.80 forecast now.
Goldman strategists led by David Kostin predicted $173 for next year. Tobias Levkovich at Citigroup called for $172.50, or 6 percent growth.
“The previously assumed growth of 12 percent next year was simply too high, and a reset was needed for companies to have a chance to meet or beat Street projections,” Levkovich wrote in a note. “A number of high-profile corporations trimmed their outlooks and the Street was forced to take notice.”
Not everyone is worried about the risk of further downgrades, and indeed, bears incorrectly predicted throughout the early part of this year that profit growth had peaked. Diane Jaffee, senior portfolio manager and group managing director of relative value strategies at The TCW Group, attributes the lack of corporate optimism to the trade tensions between the U.S. and China and sees bargains emerging after the sell-off.
“We saw double-digit earnings growth in 2017 and 2018. We should continue to see that in 2019," she said. “Confidence is now lacking by businesses saying we can’t predict demand that we have seen so far will continue” because of the uncertainty over import tariffs, she added. “Once we get any clarity on that, markets should stabilize.”
This article was provided by Bloomberg News.