Seeking a scapegoat for October’s stock market convulsions? Try the dark cloud looming on the horizon known as peak earnings growth.
With profit growth poised to slow sharply in 2019 for a number of reasons – chief among them less of a jolt from the Trump tax cuts – the market swoon happening today likely reflects the bottom line reality ahead.
“The market is pricing in the [earnings growth] slowdown now,” Blackstone vice chairman Byron Wien tells Yahoo Finance.
Welcome to the twilight zone of corporate profit growth – a no man’s land where growth is still OK, but not enough to please the bulls hooked on the red-hot years of 2016 and 2017.
By the Numbers
Igniting a flame under earnings the past two years has been the tinder of low interest rates, tame inflation and a steady jobs market recovery. That caused investors to rotate into riskier pockets of the equities market, tech names like Facebook (FB) and Alphabet (GOOGL, GOOG). But that gasoline has just about burned out.
And with it, probably comes a period of unspectacular earnings growth. The deceleration has already started, in fact.
Third quarter earnings growth is pacing at 19.5% year over year, cooling from the second quarter’s torrid rate of more than 25%, according to FactSet. Current fourth quarter earnings estimates have companies reporting profit growth of 16.5%. If hit, that would be being the full year to more than 20%.
For 2019, Wall Street expects earnings growth of about 10%. But the first half of the year may be in the 7% growth ballpark, FactSet estimates.
Amid such a noticeable slowdown, the always forward-looking market is naturally getting antsy into year end. The Dow Jones Industrial Average (^DJI) is down 5% over the past month, the S&P 500 (^GSPC) has shed 6% and the Nasdaq Composite (^IXIC) has pulled back 7%. Investors have rotated out of risker names such as Facebook (down 8% in the last month) and into perceived safe-havens in the healthcare and consumer staples spaces.