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Could a Weak Earnings Season Upend the Stock Market Rally?

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US earnings season

After having a remarkable first quarter, the best first quarter since 1998, the US equity markets are getting cautious. In the first quarter, the S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite (QQQ) rose 13.0%, 11.0%, and 16.5%, respectively. Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) rose 27.2%, 18.6%, 21.0%, 33.2%, and 13.3%, respectively.

As the earnings season draws near, investors are getting cautious. J.P. Morgan (JPM) and Wells Fargo (WFC) will kick-start the Q1 2019 earnings season with their earnings scheduled for April 12.

Earnings decline

According to FactSet, analysts are forecasting an earnings decline of 3.9% for Q1 2019, which would be the first YoY decline in earnings for the S&P 500 since Q2 2016. There is also the possibility of an earnings recession, which is further weighing on investor sentiment. An “earnings recession” is defined as at least two consecutive quarters of YoY declines in corporate earnings. Currently, analysts are estimating earnings growth of 0.1% for the second quarter.

Investors might be disappointed

As reported by CNBC, DataTrek Research’s Nicholas Colas said, “Analysts have been taking their numbers down dramatically over the course of the quarter. We started the quarter basically thinking up 3% now we’re looking more like down 4%.”

He thinks even despite this significant decline in earnings, investors are yet not prepared for the disappointing numbers. He added that stocks have been supported by a dovish narrative from the Fed since the beginning of January, “but once you have to face the actual earnings results, I think the story is going to change.”

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