Stock Market Outlook 2019
Source: FactSet, Archer Bay Capital
The last three months of 2018 were extremely unpleasant in the stock market and now we have had a bit of a bounce. What just happened and what does this mean for the stock market forecast for the next 3 months — and beyond?
Since the US stock market is highly correlated to earnings, our stock market outlook 2019 looks at why the fourth quarter (October, November, and December) was so ugly, and why the market already appears calmer now. Almost half of the companies in the S&P 500 Index have reported earnings for the fourth quarter, so in hindsight, we have some sense of why the market performed so poorly at the end of last year.
The chart below shows the growth in quarterly earnings from the start of 2017 and includes forecasts through the end of 2019.
Source: Thomson Reuters, I/B/E/S, Archer Bay Capital LLC
The fourth quarter of 2018 shows a drop in the growth rate from the prior quarter and this decline continues into 2019. Earnings forecasted for the start of 2019 are almost flat in comparison to a year ago. But this data reflects what we know now: it isn’t what was forecasted as recently as September 30, 2018. At the start of the fourth quarter, Wall Street analysts were much more optimistic about 2019.
Look at the table below to see the change in what was forecasted for 2019 earnings growth at the start of the fourth quarter and what is being reported now as part of the current stock market outlook. It breaks out the economic sectors of the S&P 500 in order to give a clearer picture of which industries had the most trouble.
S&P 500 Estimated Earnings Growth by Sector for the Full Year 2019
|
Sector Earnings Growth |
as of 10/1/18 |
as of 1/31/19 |
|
Energy |
26.2% |
-5.9% |
|
Technology |
8.5% |
-0.1% |
|
Materials |
7.0% |
3.8% |
|
Consumer Staples |
6.1% |
4.1% |
|
Real Estate |
6.4% |
4.7% |
|
Utilities |
4.7% |
5.1% |
|
Communication Services |
11.6% |
5.5% |
|
Health Care |
8.3% |
6.7% |
|
Consumer Discretionary |
11.7% |
8.4% |
|
Financials |
9.7% |
9.3% |
|
Industrials |
12.2% |
10.0% |
|
>S&P 500 |
10.2% |
5.1% |
Source: Refinitiv, Archer Bay Capital LLC
The earnings growth rate expected for 2019 was cut in half in just three months. While it is common for growth forecasts to start overly optimistic and to decline as the year progresses, the magnitude of the decline — and the fact that it is broad-based across all sectors (except that Utilities are slightly up) — is unusual.
So, why did it happen?
The impact of the trade war
Again, in hindsight we have learned that the global economy outside of the US slowed down more than expected, likely due to the trade war. The threat of tariffs caused many companies to build excess inventory last summer and slow buying since then, which appears to have hurt technology and commodity companies disproportionately.
Did you know?
- Technology companies make up the largest portion of the S&P 500 — that is, 1/5 of the total — so they have an outsized impact on the index returns.
- Commodity prices are down, which hurt Energy and Materials companies.
- Consumer companies and Industrials have been negatively affected by the stronger dollar, which impacts their international businesses.
In addition, the uncertainty around trade has slowed investment spending by companies of all sizes. Why spend the money to upgrade a factory if you don’t know the demand will be there to buy the goods? It’s been a perfect storm...but will it continue? Is the bad news already priced in?
Trade disputes and the Federal Reserve
The honest answer is that no one knows, but if everything stays the same, we suspect that there will be further declines in 2019 earnings expectations. The market is watching two particular events very closely. The first is whether the US and China will resolve their trade disputes which may lead to the US delaying or cancelling the proposed tariffs on Chinese goods. If trade disputes resolve, it is expected to boost growth.
The other big unknown is whether the Federal Reserve will pause in their plans to raise interest rates this year which will help keep US spending afloat. If either, or both, of those events happen, earnings will likely resume climbing and we will get a relief rally in stocks.
What this means for your investment portfolio
It is most important to stay in the asset allocation mix between stocks and bonds that is driven by your long-term goals and ride out the volatility. It is impossible to time the market consistently. Owning the S&P 500 Index means owning some of the most successful companies in the world.
Over time, these companies have proven to be adept at maneuvering the changing global economy, even during periodic stumbles.
At Archer Bay Capital, we provide the personalized guidance you need to achieve financial independence despite the inevitable interest rate changes, market volatility, and changing forecasts. Contact us to learn more about our stock market outlook, or to schedule a consultation today.
