Many S&P 500 companies like Delta Air Lines, JP Morgan Chase, and Wells Fargo are going to share their earnings report this week while Netflix and Honeywell International will announce it next week. Mid to large scale companies in the US are likely to report a reduction in profits despite having higher revenues as per analysts. Wall Street is expecting a fall in the first-quarter earnings of up to 2.5% when compared to last year despite a higher revenue of 4.8%. The decline would be the first since 2016.
Why the decline in profits?
The decline in profits expected in the first quarter of the year is the first for a decade. The first-quarter earnings are crucial for the market as some investors believe it could either make the stocks rise or fall. There are many reasons why Wall Street believes that the profits will fall when compared to last year. The foremost thing is the US tax code which helped the profits soar by 20% last year, with that not in place this year S&P companies could see fewer profits. Moreover, due to the trade war between China certain raw materials have become costly which increases the operative costs for the company. Rising costs, tariffs, drop in sales all lead to shrinking profits.
Chief global market strategist Kristina Hopper had this to say ‘Companies are experiencing rising input costs as well as increases in labor costs from modestly rising wages.’
No clear consensus on the earnings for the rest of the year
There is no common consensus on the earnings for the rest of the year as the strategists are divided as many times since 1994 the S&P 500 companies have exceeded the expectations in earnings. Even this quarter as many as 23 S&P 500 companies have earned more than the analysts expected. Jonathan Golub who works at Credit Suisse as the chief strategist said ‘Revenue growth has been extremely stable throughout 2018 and is expected to remain so in the year ahead. We believe that investors will focus on the breadth and consistency of top-line results versus IQ margin pressures.’
There are others who are not so optimistic and believe that the first-quarter results are an indication of things to follow in the rest of the year. Many technology companies missed their mark in the last quarter and with pressure on wages and cost of materials, rising profit margins are likely to shrink further.