NEW YORK, NY – CEOs, you get one more mulligan.
Over the next few weeks, companies across the country will be telling investors how much profit they made in the last three months of 2019. Analysts along Wall Street are setting expectations very low, again. They're forecasting a fourth-straight quarter of falling profits by S&P 500 companies, according to FactSet, something that hasn't happened since 2015-2016.
That's normally a warning sign for the market because stock prices tend to follow the path of corporate earnings over the long term. Last year was notable not only because investors sent the S&P 500 to one of its best annual returns in decades, but because they did so while profits were slumping.
Investors are likely to give CEOs another pass this upcoming earnings season, which got underway this week with reports from JPMorgan Chase and other high-profile banks.
Last year was a particularly tough one for companies to deliver big growth because they were no longer getting the benefit of the first year of lower tax rates, as they did in 2018. Investors were also more willing to look past the struggles because the Federal Reserve was in the midst of a sharp U-turn in policy, as it cut interest rates three times.
But in 2020, companies will need to deliver more. That's why many investors will be paying more attention to what CEOs say about 2020 trends than about how much they made in the last three months.
“It all boils down to the guidance for 2020,” said Rich Weiss, senior portfolio manager at American Century Investments. “Can we get something more than 5% earnings growth this coming year, which arguably is going to be necessary to move this market higher? Where is that growth going to come from?”
Analysts are predicting a pickup in profits through the year, but they have a long history of making optimistic forecasts only to reel them in as reporting dates approach. Wall Street is currently calling for 9.4% earnings growth for S&P 500 companies over the course of the year, following a relatively slow start, according to FactSet.