Third-quarter earnings have, for the most part, been better than expected. It was a good “season” for bulls, as 75% of S&P 500 companies beat analyst estimates.
Q3 growth dropped by 2.4% year-over-year, but CEOs still felt good about the future. Many of them raised their full-year (and even 2020) forecasts as a result.
Then, the trade war reappeared – if only to remind investors that two of the world’s largest economies were at economic war. The market initially surged after White House economic advisor Larry Kudlow said that negotiations were going well.
Which, of course, China vehemently denied a day later.
The flip-flop – one of many in a long series of trade war contradictions – caused stocks to slow their acceleration yesterday.
And now, as of this morning, the market appears ready to drop after Home Depot posted a major earnings miss. The home improvement retailer actually beat EPS (earnings per share) predictions by 1 cent, but the devil (as usual) was in the details.
Same-store sales growth fell way below expectations (3.6% reported vs. 4.7% expected), and revenues missed too ($27.22 billion reported vs. $27.53 billion expected).
Company leadership blames the disappointing financials on investments that Home Depot made to boost future business. Those investments, CEO Craig Menear claims, have yet to show on the balance sheet.
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“We are largely on track with these investments and have seen positive results, but some of the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions,” he said in a press release.
And much like Home Depot’s S&P colleagues, year-over-year earnings shrunk. In 2018, the retailer reported $2.9 billion in earnings.
This year, the company only earned $2.8 billion – marking a 3.45% decrease, more than 1% below the average S&P yearly earnings contraction of 2.4% in Q3.
HD shares, unsurprisingly, sunk pre-market. As of midday, they remain down roughly 4.8%.
Even worse, Home Depot cut its sales forecast for the year. Company analysts expect sales to grow by only 1.8%, significantly reduced from their original estimate of 2.3%. Same-store sales growth forecasts suffered as well, cut down from 4% to 3.5%.
All-in-all, it was a rough earnings report for one of America’s top members of the consumer cyclical sector – a sector that many investors view as an indicator of consumer strength within the economic cycle.
If that’s true, then it could potentially mean that Home Depot’s ringing the “warning bell” for Q4, where even more reduced year-over-year growth could be waiting to topple equities. In 2018, bears were treated to a “flash crash” for the holiday season.
Worse yet, the market is in an eerily similar predicament in 2019.
Will lightning strike twice? It’s certainly possible.
After all, last year’s “trigger” was a trade war let-down. With the way talks are going between Washington and Beijing (according to anonymous Chinese sources), investors might get an unexpected lump of coal from “Tariff Claus” after Thanksgiving.
That could spoil the current rally in an instant, even quicker than weak Q4 earnings in early 2020.
Which, by the way, appear to be coming.
Barring some sort of Christmas miracle.