Apple's first estimate reduction in two decades helped ignite a 660-point rout in the Dow Jones Industrial Average Thursday. Bad news for investors: the iPhone maker is hardly the only company paring a forecast.
Among U.S. companies issuing estimates for the fourth quarter, 46% have revised the outlook lower, the most since President Donald J. Trump's inauguration. With White House economic adviser Kevin Hassett predicting more downgrades to come, it's drumming up angst for investors who hoped December's volatility would clear up in the new year.
While evidence of an earnings-season disaster remains scant, weakening guidance is the last thing Wall Street wants to hear as investors search for tangible signs that a trade war and tightening Federal Reserve are biting the bottom line. Expectations that earnings will rise by 8% in 2019 is a pillar in bull cases that have been decimated in one of the most volatile stretches for stocks since 2008.
"We've seen earnings growth for the fourth quarter get cut across every sector," said Jerry Braakman, chief investment officer at First American Trust. "That's why the market has moved down in December. And today is another challenging day."
Signs are multiplying that trade-related spillovers are affecting economies around the world. A gauge of U.S. manufacturing plunged by the most since 2008 just a day after Apple cut its sales outlook, fueling investor concerns that global growth is cooling. The combination sent the S&P 500 spiraling lower by 2.5% and the Nasdaq 100 tumbling 3.4%, led by the worst slide for Apple since January 2013.
The executive branch weighed in, with Mr. Hassett, the chairman of the White House Council of Economic Advisers, saying the ongoing tariff war with China may force many U.S. companies to cut earnings projections until the two countries work out a deal.
"It's not going to be just Apple," Mr. Hassett said in an interview on CNN. "There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China."
Delta Air Lines reduced its revenue forecast Thursday for the second time in two months after disappointing ticket pricing. Considering the slowdown came over the holiday season, the timing calls into question just how healthy the consumer really is. Pair that with Apple's weakened forecast and earlier warnings from FedEx and Micron, and the outlook is getting shaky.
"If you think about what's been the primary theme we've heard over the last six months, particularly, yes things might be slowing, but the consumer is really healthy," said Joe "JJ" Kinahan, chief market strategist at TD Ameritrade. "There are very few more consumer-driven products than Apple. If they're experiencing a slowdown, what does that actually truly mean for the consumer overall?"
Heading into the fourth quarter reporting season, every S&P 500 sector except materials and industrial companies has seen meaningful declines in earnings-per-share expectations, according to Bloomberg Intelligence. As they stand, profit forecasts for the S&P 500 on average have fallen 1.5 percentage points since the start of December. Revenue estimates have declined 0.2% over the same period.
As a result, profit margins remain a central concern. Take Facebook. Analysts are expecting the social media giant to post 0% earnings growth from last year through 2019. Meanwhile, revenue is expected to rise to $68 billion in 2018, up nearly 23%.
A dimmer outlook for tech giants is taking hold. Google parent Alphabet Inc. is expected to post earnings growth that's less than that of the broader market this year — 5% for Alphabet, compared with a rise of 8.3% for the S&P 500.
If earnings estimates get wobbly, so do bull cases premised on forward valuations. The price-earnings ratio of the Nasdaq 100 Index hit a four-year low below 20 last month and the S&P 500's 12-month forward multiple is hovering near its lowest level in over five years.
Should earnings estimates suffer an influx of cuts, the innate value of equities could become less appealing.
"We'll have a decline in S&P earnings this year. We've got a ways to go until Wall Street catches up with that expectation," said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management. "The prices have moved, but not the earnings. Now what will happen is forward earnings will start coming down and we suddenly may find out they're not much cheaper than they were at their peaks."