By Chris Matthews
Even mildly pessimistic guidance has investors spooked amid
macro headwinds
Earnings for S&P 500 companies grew by 25.8% in the third
quarter, the strongest performance since the third quarter of 2010,
when companies benefited from very attractive, recession-era
comparable earnings.
Nevertheless, from the start of earnings season to the close of
trade Friday, the S&P 500 index has fallen 2.7%, the Dow Jones
Industrial Average 1.1%, and the Nasdaq Composite Index 5.5%.
"Third quarter earnings were outstanding both on earnings and
revenue growth, the percentage of companies beating expectations,
and the magnitude of those beats," Michael Arone, chief investment
strategist at State Street Global Advisors, told MarketWatch.
But the selloff that accompanied these announcements is a
testament to the fact that "Wall Street doesn't care what you've
done in the past. It's all about what you're going to do next
quarter," Arone said.
The pairing of rosy earnings announcements and stock market
declines can be explained by several big name companies issuing
cautious guidance going into the fourth quarter, Tom Essaye,
president of the Sevens Report, told MarketWatch.
"The market doesn't even need most companies to issue weak
guidance to trigger a selloff in this environment," Essaye told
MarketWatch. "It's the top hundred most widely held companies that
mostly drive markets."
Essaye points to Caterpillar Inc.'s (CAT) earnings as a
microcosm of the market overall. The company beat expectations on
earnings and revenue, but it's guidance indicated that the
construction-equipment manufacturer is already experiencing rising
input costs as a result of new tariffs on steel and other products.
Shares fell nearly 13% following its earnings release before
subsequently recovering.
"These sorts of details play into existing fears in the market
about rising costs and tariffs, which will more than double in
January," if U.S. and Chinese officials can't strike a trade deal
before the end of the year, Essaye said.
Another bellwether firm that issued disappointing guidance was
Apple Inc., (AAPL) which decided to cease reporting the number of
iPhones and other products it sells, leading BMO Capital Markets
analyst Tim Long to lament
(http://www.marketwatch.com/story/apple-stock-falls-after-earnings-as-investors-grapple-with-houdini-like-move-2018-11-02)
that the "lack of transparency is disappointing, and will likely
limit investor's visibility into the company. He continued, "Our
view remains that units may not grow at all going forward." Apple
shares are off 11.6% since the end of October.
Even more worrying is the guidance being reported by Apple
suppliers
(http://www.marketwatch.com/story/ams-joins-list-of-apple-suppliers-trimming-outlooks-2018-11-14).
AMS AG, (AMS.EB)Lumentum Holdings Inc, (LITE) and Qorvo Inc. (QRVO)
all warned of lower than expected sales this week, feeding into the
negative sentiment toward America's most valuable company in
particular and the tech sector in general.
These stocks were joined by a diverse set of companies from 3M
Co. (MMM) to Qualcomm Inc., (QCOM), which spooked investors with
less-than-encouraging outlooks.
Macro headwinds, including trade tensions, rising interest
rates, a stronger dollar, and slowing growth abroad have also
helped to trigger a pivot towards negative sentiment in the market.
"This is where peak earnings growth comes in," Essaye said, arguing
that the stock market has been supported this year by two pillars:
strong economic growth and strong earnings growth.
"The market knows that earnings growth has peaked, and so
earnings growth can't be a reason any longer to ignore the macro
picture," he said.
Read:Here's how Brexit turmoil could become a problem for U.S.
and global investors
(http://www.marketwatch.com/story/heres-why-brexit-turmoil-is-a-source-of-worry-for-us-investors-2018-11-15)
The evidence of this fallen pillar can be seen in the
performance of the major indexes in the past week, where volatility
reigned supreme while stocks ground lower. The Dow fell 2.2% over
the past five trading days, while the S&P took a 1.6% hit, and
the Nasdaq fell 2.2%.
With 93% of S&P firms having reported earnings for the third
quarter, according to FactSet, investors minds will be
laser-focused on looming macro threats, as well as economic data
and comments from Federal Reserve officials.
While U.S. markets will be closed Thursday for the Thanksgiving
Day holiday, there will be much data for investors to digest in the
week ahead, starting with the National Association of Home Builders
Index on Monday at 8:30 a.m. Later that day Federal Open Market
Committee member and New York Fed President John Williams will
participate in a moderated question-and-answer session in New
York.
Tuesday will bring data on both new building permits and housing
starts, further informing investors on the state of one of the U.S.
economy's most depleted sectors. Wednesday will feature several
major reports, including data on durable orders, initial jobless
claims, the Conference Board's Index of Leading Economic
Indicators, and the University of Michigan's consumer sentiment
gauge.
On Friday, Markit will give investors a look at the state of
both the manufacturing and services sectors, with preliminary
readings of both Purchasing Managers Indexes. And, of course, the
day after Thanksgiving will also be Black Friday, launching the
holiday shopping season that can make or break U.S. retailers.
(END) Dow Jones Newswires
November 18, 2018 17:05 ET (22:05 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.