The first quarter earnings season is about to gather steam, with several major banks expected to release their results tomorrow. However, expectations for first-quarter 2019 earnings are far from encouraging at present. Concerns about a global economic slowdown, intensifying tariff conflicts and various geopolitical issues have worsened the situation.
Disappointing Expectation from First-Quarter Earnings
Investors are cautious owing to a widespread notion that first-quarter earnings will decline year over year for the first time since the second quarter of 2016. Total earnings of the S&P 500 Index are anticipated to be down 4% from the same period last year.
Meanwhile, revenues are expected to rise 4.6%. Broad-based margin pressure across all major sectors is the primary reason for an expected earnings decline. The last time this type of situation occurred (positive revenues but negative earnings) was in the third quarter of 2008.
Concerns Regarding Global Economic Slowdown
On Apr 9, the International Monetary Fund (IMF) reduced global economic growth forecasts for 2019. This was the third reduction in the last six months. The new growth projection is 3.3% compared with 3.5% projected in January and 3.7% forecast in October.
The projection for U.S. economic growth was reduced to 2.3% from 2.5%. Notably, on Mar 20, the Fed lowered the U.S. GDP growth rate to 2.1% in 2019 from 2.3% projected in December.
The IMF cited trade-related conflict, likelihood of a tighter monetary policy by central banks, especially the Fed, appreciation of U.S. dollar prices and geopolitical concerns such as Brexit and middle-east problems as near-term challenges.
Trade Tensions Reignite
On Apr 8, the U.S. Trade Representative proposed to levy tariffs worth of $11 billion on an array of Eurozone products including large commercial aircraft and parts, dairy products and wine. This is a retaliatory measure to what the Trump administration believes are illegal subsidies that the Eurozone countries provide to Airbus. This will impact sales of U.S. made aircraft. However, the European Union has strongly objected to White House and threatened to impose retaliatory tariffs.
The newly formed trade and tariff agreement called United States Mexico Canada Agreement (USMCA) that replaced the old North American Free Trade Agreement (NAFTA), is facing hurdles to be cleared by the U.S. Congress. Majority House Democrats and a key Senate Republican have expressed concerns over the deal.
Finally, the year-long trade conflict between the United States and China is yet to be resolved. Notably, China, Canada and Mexico together constitute 46% of U.S. foreign trade.
The Brexit doldrums are still continuing. The British parliament, which rejected prime minister Theresa May’s Brexit deal, has failed to reach to a consensus despite voting twice. On Apr 10, European Union and the U.K. government agreed to extend the Brexit deadline till Oct 31. Prolonged Brexit drama took a severe toll on the U.K. economy. Consumer confidence weakened significantly and business establishments have almost frozen capital spending.
On Apr 8, President Trump designated Islamic Revolutionary Guards Corps, a powerful arm of the Iranian military as a foreign terrorist organization. The designation will worsen the already sour relationship between the two countries after the United States imposed oil sanction on Iran in November 2018.
Meanwhile, a full-scale civil-war has started in Libya and U.S. military has decided to pull out a small contingent of American forces from that country. Breakout of civil-war will severely disrupt global oil supply in the near future.
Our Top Picks
At this stage, it will be lucrative to invest in high-yielding stocks in order to ensure a steady income stream. We further narrowed down our search to five stocks with a Zacks Rank #1 (Strong Buy) with strong earnings estimates revision and positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Franklin Resources Inc. BEN provides asset management services to individuals, institutions, pension plans, trusts and partnerships. It has an Earnings ESP of +0.3% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 5.1% and 3.4%, respectively, over the last 30 days. The stock carries a dividend yield of 3%.
Jones Lang LaSalle Inc. JLL provides commercial real estate and investment management services worldwide. It has an Earnings ESP of +34.6% for the current quarter. The Zacks Consensus Estimate for the current quarter and current year has improved 20.3% and 2.6%, respectively, over the last 30 days. The stock carries a dividend yield of 0.5%.
Sanderson Farms Inc. SAFM produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. It has an Earnings ESP of +16.1% for the current quarter. The Zacks Consensus Estimate for the current quarter and year has improved 91.3% and 111.4%, respectively, over the last 30 days. The stock carries a dividend yield of 1%.
Legg Mason Inc. LM is engaged in providing asset management, securities brokerage, investment banking and related financial services to individuals, institutions, corporations and municipalities. It has an Earnings ESP of +2% for the current quarter. The Zacks Consensus Estimate for the current quarter and current year has improved 2% and 2.1%, respectively, over the last 30 days. The stock carries a dividend yield of 4.5%.
MSCI Inc. MSCI is an independent provider of research-driven insights and tools for institutional investors. It has an Earnings ESP of +3.4% for the current quarter. The Zacks Consensus Estimate for the current quarter and current year has improved 0.7% and 1%, respectively, over the last 30 days. The stock carries a dividend yield of 1.1%.
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