Flat earnings are the market's best hope in 2019

Key Points
  • Overall earnings may be little changed in 2019 above last year's record pace, according to an analyst at Refinitiv.
  • Some sectors, such as energy and industrials, will be down significantly.
  • Consumer and defensive sectors will post some gains.

Here's the good news on earnings: Despite much hand-wringing around tariffs and the global economic outlook, overall earnings for the S&P 500 in 2019 remain "flattish," meaning they are likely to be little changed from 2018's record pace.

The bad news: Investors remain on edge because confidence in the estimates are not high.

"The wild card is trade because you really don't know if you are going to get a tweet one day that is going to change the dynamics of the trade war," said David Aurelio, who tracks earnings for Refinitiv.

What's clear is that concerns about tariffs and overall global growth are starting to take a toll on the sectors that are most exposed to the global economy, particularly energy, materials and industrials, all of which have seen declines in earnings estimates for the third quarter starting July 1.

Energy, for example, has seen earnings estimates decline 14.6% since July 1, an unusually large downward revision.

Q3 earnings revisions: cyclicals

(% change in estimates from July 1 to present)

Energy - down 14.6%

Materials - down 13.4%

Industrials - down 4.2%

Source: Refinitiv

(Note: these figures represent the percentage decline in third-quarter estimates from July 1, not the year-over-year gain or loss in earnings)

Materials has also seen a double-digit decline thanks to large reductions in estimates for Freeport McMoRan and Dow.

Some industrials also saw notable downward revisions — Caterpillar and Boeing in particular, though Boeing's issues are largely tied to the 737 Max grounding.

But there is some good news: Technology has seen very little downward revisions since July 1.

Because the U.S. consumer held up well, consumer discretionary and consumer staples have also held up well. The exception was Amazon, which saw a significant reduction in Q3 earnings estimates (about 25%) in July, dragging down consumer discretionary.

Q3 earnings revisions: consumer sectors

(% change in estimates from July 1 to present)

Consumer discretionary - down 5.5%

Consumer staples down - 1.2%

Source: Refinitiv

Without Amazon, the 5.5% in consumer discretionary would have been half that.

Smaller defensive sectors like real estate and utilities are also holding up well.

Q3 earnings revisions: defensive sectors

(% change from July 1 to present)

Real estate - up 1.1%

Utilities - down 1.8%

Source: Refinitiv

Despite the worries, Aurelio believes "flattish" is still the most likely outcome for 2019.

"Because of the trade tensions, everyone has been fairly conservative on their estimates," he said.

He also noted that capital expenditures are still expected to grow in 2019, though in the low single digits. "That, combined with still positive consumer sentiment, supports the notion that earnings will remain flattish," he said.