Are profits close to peaking?

Here's the good news: Corporate profits for the third quarter should be really strong. Now for some bad news...

Posted: Oct 9, 2018 6:18 PM
Updated: Oct 9, 2018 6:18 PM

Here's the good news: Corporate profits for the third quarter should be really strong. Now for some bad news: It might be all downhill from here.

Analysts are predicting that earnings for the S&P 500 will rise nearly 20% from a year ago. We'll get a better sense of just how well big US companies are doing later this week when Delta (DAL), Walgreens (WBA), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) report their results and give outlooks for the remainder of the year.

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Investors will be particularly attuned to companies' forecasts. According to estimates from FactSet Research, companies should still post solid earnings for the fourth quarter. Analysts are projecting profit growth of more than 17% from a year ago.

But the combination of rising bond yields, trade tension with China and tougher comparisons to this year could mean that earnings growth in 2019 will slow dramatically. Earnings are expected to grow just a little more than 7% in the first and second quarters of 2019.

Trade tiff with China could hurt profits in 2019

Consumer companies in particular look vulnerable.

Earnings estimates have fallen for struggling Victoria's Secret owner L Brands (LB), Lowe's (LOW), General Motors (GM), Ford (F), tobacco giant Philip Morris (PM) and meat processor Tyson Foods (TSN), noted John Butters, senior analyst with FactSet Research, in a recent report.

That's why investors will have such a focus on companies' guidance as well, in light of the waning benefit from lower corporate tax rates and the potential for a stronger dollar eating into international sales and profits, said Lindsey Bell, investment strategist with CFRA, in a report.

More tariffs kicking in on Chinese goods also could boost on profits next year. Worries about a trade war getting even nastier could lead companies to give ultra-conservative outlooks. Bell expects tariffs will be the most highly discussed topic on upcoming earnings calls.

"Corporate management teams have no incentive to be overly optimistic given the current tariff situation," Bell said.

Still, some analysts think the tariff gloom and doom is overdone. Companies may be able to weather the trade war in the future as they have in the past.

"We think tough tariff talk is more politics than economics and that investors are overestimating the negative side effects for financial markets," noted Jeffrey Cleveland, chief economist of Payden & Rygel, in a report.

Cleveland conceded the global economy may be slowing a bit but it is still expected to keep growing. And he added that investors shouldn't get too worked up about rising bond yields yet. He does not think they will move high enough to slow profit growth.

"Do higher rates spell trouble for markets? Not in our view. Rates are 'rising for the right reasons' (a strong economy). Good economic growth is great for stocks," he wrote. "This economic cycle is not yet nearing its end."

That may be true. But investors will feel a lot better if corporate leaders take a more upbeat tone when they report their results. If they don't, then expect concerns about this latest batch of earnings being as good as it gets to come back with a vengeance.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 255125

Reported Deaths: 5574
CountyCasesDeaths
DeSoto17197175
Hinds16280322
Harrison13502193
Rankin10749211
Jackson10407183
Lee8819141
Madison8262162
Jones6375110
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Tate272462
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Pike263577
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Scott246645
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Holmes168767
Clay159433
Stone143621
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Clarke138960
Calhoun136121
Smith120823
Yalobusha117034
Walthall112336
Noxubee110522
Greene110229
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Carroll104521
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Perry102231
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Humphreys83024
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Kemper77220
Quitman6918
Franklin66615
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Wilkinson58425
Jefferson54319
Sharkey43017
Issaquena1596
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Alabama Coronavirus Cases

Cases: 424028

Reported Deaths: 6121
CountyCasesDeaths
Jefferson62258921
Mobile30381549
Madison27160186
Tuscaloosa20779267
Montgomery19049305
Shelby18572114
Baldwin16346182
Lee12515101
Morgan12260113
Etowah11757168
Calhoun11161200
Marshall10199107
Houston8630148
Cullman8036105
Limestone802874
Elmore7849101
DeKalb768897
Lauderdale760083
St. Clair7555120
Talladega6180108
Walker5903174
Jackson581341
Colbert533573
Blount530883
Autauga519855
Coffee443956
Dale398581
Franklin367548
Chilton337665
Russell331710
Covington327768
Escambia319342
Dallas303396
Chambers284269
Clarke282133
Tallapoosa2617107
Pike249429
Marion246250
Lawrence244247
Winston227335
Bibb216247
Geneva202535
Marengo199729
Pickens197031
Hale176442
Barbour173036
Butler170258
Fayette169026
Cherokee160530
Henry154421
Monroe145617
Randolph140735
Washington137726
Clay126745
Crenshaw119544
Lamar118219
Cleburne117723
Macon115035
Lowndes110735
Wilcox103121
Bullock99128
Perry97719
Conecuh94420
Sumter89126
Greene76123
Coosa60515
Choctaw51524
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