‘Slowing Growth’ Effect On Companies’ Earnings Forecasts

The slowing growth outlook for the economy started last October, triggering the fourth quarter bear market. So, how have analysts changed companies’ 2019 earnings estimates as a result? Does the 2019 market rise mean the slowing growth concern is overstated or that price/earnings ratios have risen?

A good way to address those questions is to look at the thirty Dow Jones Industrial Average company results.

Note: The 2019 earnings estimates for the DJIA companies come from the weekly tables in Barron’s. The estimates are for the calendar year, 2019, adjusting for different fiscal years. Here are the eight companies that require adjustment from their fiscal year estimates:

• May 31: NIKE
• June 30: Microsoft and Procter & Gamble
• July 31: Cisco
• August 31: Walgreens
• September 30: Apple, Disney and Microsoft

The adjusted 2019 earnings per share (EPS) estimates use the four quarterly earnings estimates that most closely match the calendar year. Two companies that have a January 31 fiscal year-end (common to retailers) are unadjusted: Home Depot and Walmart.

These following exhibits (two tables and a graph) show the changes. (Boeing’s stock price is prior to the 737 MAX incident.)

The following graph shows the data from above, but it is a bit challenging. The horizontal axis is the percentage change in the EPS estimate, and the vertical axis is the percentage change in the stock price. The upward-sloping, dashed line represents equal moves in EPS estimate and stock price.

To interpret the graph, look at three items in particular. First, the change in the EPS estimates. If the anticipated economic slowdown has had an effect, it should show up here. Second, look at the price change – it would be expected to shift in the same direction. Last, look at the dot placement, recognizing that above the dashed line means stock price performance was better than the EPS estimate change – and below, the opposite.

Of course, the slowing growth concern was not the only effect on a company’s estimate and price. Individual (“specific”) company information can have overriding economy/market effects. Even without extraordinary events (like the one shown for Boeing), there were two earnings report periods that occurred during this time. Also, the price change is based on two, distinct points in time. Either date could have been affected by a temporary movement that then later reversed (i.e., normal volatility).

So, is there evidence of a slow growth concern, even after this quarter’s market rise? Yes, but not overwhelmingly so. Here are the indications:

• The averages (unweighted) were negative: -3.3% EPS estimate and -1.4% price
• Twenty of the companies had EPS estimate reductions

The bottom line

Two stock market issues continue to dominate the news: Slowing growth reports/forecasts and steadily climbing market. Why the divergence? There are two opposing views, one positive and one negative:

• First, the positive. The stock market is climbing the “wall of worry,” looking beyond the current slowing with expectations of growth returning during the next six months – the common outlook period
• Second, the negative. Investors, not the stock market, have climbed their own wall of worry from concern to optimism, meaning prices are too high for the still significant “slowing growth” concern

With stock prices and valuations nearing their pre-bear market levels, and with 2019 earnings estimates only down slightly, it certainly feels like the market is back to normal.

However, that issue of slowing growth remains active. It is spread broadly throughout the economy and across the globe. That is a serious risk, made heavier by the fact that every recession begins with slowing growth being accompanied by expectations that things will soon turn up again.

Therefore, a decent portion of cash reserves continues to look like a good stock investment strategy.