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Wall Street’s Earnings Forecasts Are Dropping Fast

February 1, 2019, 1:00 AM UTC

Though few investors are noticing, or want to, Wall Street is predicting a chill in earnings for most of 2019—rescued by a surge to new heights at the close of the year. The “chill” scenario is convincing. The big defrost that’s supposed to salvage the outlook from mediocre or worse––is not.

The bull case for 2019 holds that although earnings growth won’t prove nearly as strong as last year, profits will still rise in the mid-to-high single digits, not bad at all, considering that 2018 is a tough act to follow, a blockbuster four quarter span that shattered all records.

Investors should be wary of the widespread view that 2019 will modestly improve on the best year ever. Securities analysts’ forecasts for future earnings are almost always overly, or even wildly, optimistic. The estimates made for a quarter nine months hence drop sharply as that earnings season gets closer and closer, and the reported profits are almost always a lot lower than the forecasts posted months earlier.

What’s unsettling is that analysts already foresee almost no profit growth, not just for Q1, but for the first nine months of 2019. FactSet, the financial data and analytics firm, polls analysts to establish their consensus readings on the course of future profits. In its “Earnings Insight” report released on January 25, FactSet noted that Wall Street forecasts EPS gains of just .7% in Q1, and 2.1% for the three quarters ending September 30, registering a tiny increase from $122.68 to $125.27.

So equity analysts anticipate almost zero inflation-adjusted growth in earnings-per-share for most of the year. That Wall Street is turning pessimistic should sound an alarm. When the banks and brokers think things will get bad, look for the actual numbers to be worse. In fact, the view that 2019 will still be a pretty good year depends entirely on predictions for a blowout fourth quarter. According to FactSet, the consensus calls for a jump of 11.5% over Q4 of 2018 to $44.92 a share. That powerhouse finale would raise EPS gains for the year to 6.3%.

Those astoundingly backloaded estimates render even the middling profit forecast extremely questionable. The farther out the estimate, the more unreliable, and more vulnerable to a radical downshift, it becomes. Welcome once again to fantasyland.

The fantasy is fading, as shown by the rapid drop in that full-year profit forecast. As late as December 31, the reading stood at 7.8%. How likely is an almost 12% resurgence in Q4? The predicted $44.92 would exceed the highest quarterly result ever achieved, notched in Q3 of last year, by almost 5%. Analysts predict that S&P 500 revenues will wax just 4.8% in 2019, a drop of almost 4 points from last year, and a figure that, once again, is likely inflated by over-optimism. So in effect, Wall Street anticipates that margins for the year will rise from their already never-before-seen heights as a share of national income, revenues and shareholder equity to generate 6.3% increases in EPS. And by Q4, those margins would need to tower well above the epic, never-before-seen levels of 2018.

BThe analyst community’s surprise prediction of zero “real” profit growth for most of 2019 should be extended to all of 2019. Earnings don’t defy economic gravity forever, and if investors really read its signals, Wall Street––in its own way––is acknowledging that gravity is taking hold once again.