Business

The market's earnings losing streak may be about to end

Posted January 17, 2020 12:22 p.m. EST

— Earnings season is off to a strong start. We haven't been able to say that in a long time.

JPMorgan Chase, Citigroup, BlackRock and Morgan Stanley all reported results for the fourth quarter that topped forecasts. So did Delta and Dow component UnitedHealth.

If the trend of companies surpassing Wall Street's estimates continues, Corporate America may break its earnings recession — a streak of three consecutive quarters in which profits dropped year-over-year.

Analysts are currently predicting another decline in earnings for the S&P 500 in the fourth quarter -- but of only about 2.1% according to estimates from FactSet Research. So if companies wind up beating forecasts, as they often do, then that will mean that earnings may finally go up again.

"Earnings expectations for this quarter are quite low so it should be somewhat easier to beat them. We should have a decent earnings season," said John Praveen, a managing director and portfolio manager with QMA.

That could be a good sign, especially if companies are confident enough to raise their outlooks for 2020 as well.

Rebound in profits coming this year?

Analysts now predict earnings in the first quarter will be up nearly 5% from a year ago, according to FactSet. The earnings momentum should build throughout the year. Analysts expect a 9.5% jump in profits for all of 2020.

Praveen told CNN Business that earnings growth of about 10% this year seems like an achievable target thanks to stronger global growth forecasts. Big multinational companies should benefit the most from revenue and profit gains in their overseas businesses, he said.

The fact that many big financial companies are doing so well -- State Street, Charles Schwab and US Bancorp also topped analysts' earnings forecasts -- is a good sign for the rest of the market and broader economy as well.

"We could see more strength for the rest of Corporate America," said Mark Doctoroff, global co-head of the financial institutions group at MUFG. "The earnings recession may be over."

Doctoroff said in an interview with CNN Business that it was particularly encouraging to see how many banks reported solid results from their consumer lending units. The combination of a healthy job market and lower tax rates for many Americans is helping offset the Federal Reserve's three interest rate cuts last year that have hurt profit margins for some banks.

Still, companies in other sectors also need to report strong results for the earnings recession to finally end.

Busy week of earnings lies ahead

More blue chips will release their earnings during next week's holiday-shortened trading session. (US markets are closed Monday for Martin Luther King, Jr., Day.)

On tap are IBM, Netflix, Johnson & Johnson, Comcast, Procter & Gamble, United, Southwest and Intel, just to name a few.

"It's pretty clear that the earnings slowdown is probably coming to an end and we're probably headed for a modest recovery. The economy continues to do okay," said Ed Clissold, chief US strategist with Ned Davis Research. "But we'll get a better feel when we get earnings from more tech and consumer companies in the coming weeks."

Clissold added that investors are hoping that even more blue collar manufacturing sectors start to show strong growth. That could push stocks, which are currently at all-time highs, to keep hitting new records since it would justify the broader market rally.

"What could make earnings go from good to great would be a bigger pickup from traditional sectors like energy, materials and industrials," Clissold said.

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