Talking Points AM/Larry Edelman

The dog ate my homework, and other excuses you’ll hear this earnings season

Macy’s didn’t have a very merry Christmas.
Macy’s didn’t have a very merry Christmas.(Bebeto Matthews/Associated Press/File 2017)

Blame it on Cain: Corporate earnings season is almost upon us, with almost half of all companies in the S&P 500 set to report financials between Monday and Feb. 1.

Let the excuses begin.

The final three months of 2018 were turbulent: trade tensions between the US and China; slowing growth in Asia and Europe, and uncertainties surrounding Brexit; the partial government shutdown in Washington; and what I call the Fed Freakout, a sharp sell-off in stocks fueled by fears that the Federal Reserve’s campaign to bring interest rates up to normal levels would end in a recession.

All of this had a very real impact on business, which explains why S&P 500 companies are expected to post growth in earnings per share of about 11 percent, down from 25 percent in each of the first three quarters of the year, according to financial data firm FactSet.

Already, Apple warned that it will record its first October-December sales drop since Tim Cook took the reins in 2011. The company’s explanation for the shortfall: weaker demand for its iPhones in Greater China, which includes the mainland, Hong Kong, and Taiwan.

For the final quarter, 72 S&P 500 companies have issued negative EPS guidance and 33 S&P 500 companies have issued positive EPS guidance, according to a Jan. 4 FactSet report. That was before another round of warnings on Thursday.

And you shouldn’t be surprised if even more CEOs blame forces outside their control for slower EPS growth, or missing Wall Street earnings estimates, or lowering guidance for 2019.

Some of them will have a legitimate alibi; others will be taking advantage of a particularly unsettled global environment to paper over their own problems.

“We would expect more downward revisions to come as the earnings period unfolds, even as we expect Q4 results to be better than expected overall,” Lindsay Bell, an investment strategist at CFRA, said in a note to clients on Thursday. “Corporations have every incentive to be conservative at this point given the weakness in economic activity from China, a slowdown in Europe, uncertainty regarding the trade outcome and higher interest rates domestically.”

Indeed, on Thursday, Macy’s cut its guidance for 2019 after posting weak holiday sales, and results at Kohl’s were also underwhelming.

Overall, last year was especially good for corporate America thanks to a solid economy and tax cuts. But the US is facing some headwinds and the tax cut sugar rush is wearing off.

As the Fed Freakout shows, investors have already lowered their expectations by bringing down stock prices. The question remains: Will those forecasts have to be cut again after all the quarterly reports are in?

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