1Q Corporate Results: 3% Earnings Growth Expected In 2019

Summary: Overall, corporate results in the first quarter of 2019 were good, but not great. Sales and earnings growth were 6% and 8%, respectively. Margins rebounded from the end of 2018 but are still below the cycle high made in 3Q18.

Looking ahead, analysts' expectations for 10% earnings growth in 2019 have been revised down to 3%. This estimate will be about right if margins can be maintained at the their 1Q19 level, but if the dollar continues to appreciate, earnings growth could be close to zero and another drop in oil prices could cause earnings to decline.

Valuations are now back to their 25-year average. They are not cheap, but if investors once again become ebullient, there is room for valuations to expand. With earnings growth likely to be negligible, the key for share price appreciation in 2019 is likely to hinge almost entirely on valuations expanding.

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96% of the companies in the S&P 500 have released their first quarter (1Q19) financial reports. The headline numbers were good, but not great. Here are the details:


Sales

Quarterly sales grew 6% over the past year. On a trailing 12-month basis (TTM), sales were 8% higher yoy, a strong result (all financial data in this post is from S&P). Enlarge any image by clicking on it.

Fund Managers' Current Asset Allocation - May

Summary:  Although fund managers are less bearish than they were at the start of 2019, they are far from being bullish.  They are overweight cash. Their global equity allocations are almost a standard deviation below the mean. Their bond allocations are at a 7-year high. A slight majority expect profits to contract and economic growth to fall in the next year.

This is a far cry from 2018, when fund managers came into the year with cash levels at 4-year lows and allocations to global equities at 3-year highs. Global equities ended the year 15% lower.

US and European equity allocations remain low relative to levels seen at prior market peaks. Emerging markets are the consensus long. The US dollar is considered the most overvalued in 16 years, a possible tailwind for US multi-nationals and ex-US equities.

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Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best, as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

Our sincere gratitude to BAML for the use of this data.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight cash and underweight equities. Enlarge any image by clicking on it.

Within equities, the emerging markets are overweight while Europe, in particular, is underweight. The US is close to neutral.

A pure contrarian would overweight equities relative to cash and bonds, and European equities relative to emerging markets. 

Weekly Market Summary

Summary:  SPX, NDX and COMPQ are now all at new all-time highs (ATH). The Russell 3000 and Wilshire 5000, which represent essentially all of US equities, are also at their prior highs. The trend remains higher. Moreover, strong starts to the year and multi-month gains have a very high propensity to lead to further gains in the months ahead and by year end. There are precedents for the index to top now, but those are the exception.

Sentiment has become more bullish. This can certainly mark a top, but the historical record is inconsistent. It's a warning, not a red light.

In the most important respects, breadth is fine.

On balance, all of this leans bullish, but it would be a mistake to assume the indices will just sail higher in the remainder of the year. That can happen, but most often a drawdown much more than the barely 2% seen so far in 2019 will occur, even after a start like the current year.

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US equities continue to grind higher. SPX, NDX and COMPQ ended the week at new ATHs. They have risen in each of the first 4 months of the year. The leader is NDX, which has risen 18 of the last 19 weeks since Christmas Eve (table from alphatrends.net). Enlarge any chart by clicking on it.