With about one-fourth of the S&P 500 reporting third quarter earnings, several high-profile earnings misses have analysts wondering if the long-feared earnings recession may be getting closer.
In recent weeks, Federal Express, McDonald's and now Caterpillar and Boeing have all missed earnings expectations by a significant amount:
In addition, Texas Instruments gave very poor revenue guidance for the fourth quarter, roughly 11% below consensus.
These misses are not trivial. This quarter, 83% of the companies reporting have beaten expectations by an average of 4.2%, according to Refinitiv, so earnings misses of any sort by a large company are fairly rare.
While the misses are not trivial, others are noting that they are indeed outliers. Nick Raich, who tracks earnings at the Earnings Scout, notes that about 14% of companies are missing earnings estimates this quarter, about in-line with historical trends.
Raich also noted that most of these large misses are either company specific or sector specific. The issue of Boeing and the 737 Max jet are well known. FedEx had many company specific issues; its competitor UBS did not report the same type of problems. McDonald's reported U.S. same store sales below expectations, but there was significant traffic diversion around the "chicken sandwich" wars at competitors like Popeye's.
Raich's conclusion: "If FedEx and McDonald's and Boeing really reflected trends in the broader economy, you'd be seeing far more companies missing and overall guidance much worse than it is."
That leaves Caterpillar, which has become the poster child for tariff wars and the global industrial economy. On the conference call, Caterpillar executives specifically cited reduced dealer inventory "due to uncertainty in the global economy resulting from trade tensions and other factors," and also that end user demand was flat. The implication was that this would continue into the fourth quarter and possibly into 2020.
Raich notes that the Street has been well aware of Caterpillar's problems (revenues are flat this year, earnings barely positive), reflected in the fact that the stock is up only 5% this year.
"Caterpillar's earnings trends have been very poor for over a year, but I'm hoping now that the worst of the earnings cuts are over. A year ago I would have said no," Raich told me.
The Street seems to believe that the worst of the earnings downtrend for Caterpillar is indeed over: the stock is up today on what appears to be very poor earnings and guidance.
"The stock reaction is telling you, bad news is already priced in," Stefanie Link with Nuveen said on our air today.
A bigger issue: is the global growth malaise getting priced in? Many observers have noted that the market narrative has shifted from "fear of a recession in 2020" to "slower growth in 2020," a far less menacing narrative.
"This has become the muddle-through market," Alec Young, Managing Director, Global Markets Research at FTSE Russell, told me. "People are expecting one to two percent GDP growth, and five percent or less earnings growth," in 2020.
Throw in expectations of fiscal stimulus from Europe, and the remaining large wildcards are China trade and the Fed.
"We need news on trade or the Fed to get us to break out of the range we are in." he told me. "We need to have the next round of tariff increases in December come off the table," adding he expected the Fed to cut rates for the third time this year next week.
The problem, Young concluded, is the risk-reward is not very well balanced. If things go well, the market could grind higher 10% in the next few months. If things don't go well, the downside is definitely greater than the upside.