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Markets Shift Focus to Earnings Outlook after Solid First Quarter

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Strong Q1 performance

The equity markets are in a celebratory mood, as they had their best first quarter since 1998. In Q1 2019, the S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite (QQQ) gained 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. This strong quarterly performance was more noteworthy given the dismal returns in the preceding quarter led by tech stocks.

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The strong market performance can be attributed to two main factors:

  • the Fed’s switch to a dovish stance from a hawkish stance in Q4
  • increasing optimism about the US-China trade talks
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Focus shifting to earnings

After the end of the first quarter, investors’ focus is shifting to companies’ Q1 2019 earnings season. As reported by CNBC, investors are now readying themselves for the first earnings decline for the S&P 500 in more than two years.

The analyst consensus is calling for an earnings decline of 3.9% for the S&P 500 in Q1. As per CNBC, this would be a drop of 7.2% as compared to Q4 2018. The decline from 2018 is mainly due to higher costs owing to tighter labor markets, the ongoing US-China trade war, and the fading impact of US tax reforms.

Analysts’ take on earnings decline

While there is no doubt that the earnings will fall year-over-year in 2019, analysts are divided on the amount of the fall and the accompanying impact on the markets.

Goldman Sachs’s (GS) chief equity strategist, David Kostin, for example, warned clients about the earnings outlook and advised them to look at companies wielding pricing power in a note on March 30.

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