Profits reports are beginning to trickle into the market, and they’re painting a troubling picture for much of corporate America, especially for multinational companies with exposure to China.
Tematica Research’s chief investment officer, Chris Versace, thinks current earnings expectations for the second half of the year are “way too high.”
“We have a slowing global economy, slowing U.S economy, and no benefit from tax reform. We have tariffs and a lot of uncertainty going into the back end of the year,” Versace said on Yahoo Finance’s “The First Trade.”
According to the latest FactSet calculations, earnings are on pace to post negative growth for three consecutive quarters. The last time that happened was during the earnings recession from Q4 2015 to Q2 2016.
“You’re going to see companies issue more conservative guidance,” Versace says, “which brings the overall EPS down for the year, inflates the P/E, and I think people are going to start wondering why is the Fed cutting [interest rates]… if they do that.”
FactSet recently changed its third-quarter outlook from a gain of 0.2% to a decline of 0.3%. That’s on top of an expected decline in second-quarter earnings of 2.6%, and a 0.3% pullback in first-quarter earnings.
More ‘risk to the downside’
A handful of companies have begun reporting dimmer business outlooks. FedEx (FDX) reported that its results for the current fiscal year would be negatively impacted by “weakness in global trade and industrial production.”
Chipmaker Micron Technologies (MU) surprised Wall Street with better-than-expected quarterly earnings, despite bubbling trade tensions between the U.S. and China. However, the CEO noted inventories are high, pricing is under pressure and they expect a pullback in spending on capital expenditures.
Earlier this month several chipmakers, including Skyworks (SWKS) and Qorvo (QRVO), lowered their guidance because of the White House ban on U.S. companies selling products to Chinese tech giant Huawei.
Lennar (LEN) beat quarterly earnings expectations thanks to lower mortgage rates and strong incentives for homebuyers, but the stock was punished after the homebuilder said tariffs on Chinese goods are costing the company an average of about $500 per home.
Versace said those companies are just the tip of the iceberg. “I believe there is more risk to the downside for this earnings season,” he said.
In addition to earnings, Versace believes the Federal Reserve could be a wild card for the markets and profits in the second half of the year.
He predicts if we get no progress on China trade following the G20 summit in Japan this weekend, the Fed will sit on its hands and not cut interest rates at its July meeting.
“They’ll wait and see what more economic data has to say,” he said. “They have three other meetings after July, so they have plenty of time.”
Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.