Get Ready!! – Investors Can Expect Weak Earnings Growth Across All Major Markets In 2019

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Apr 16 2019
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Four out of six largest American banks have released their first-quarter financial results over the past week. And their results aren’t convincing.  J.P. MOrgan and Wells Fargo reported quarterly profit and revenue that exceeded analysts’ expectations. However, Goldman Sachs and Citigroup missed analyst estimations. All eyes are now on Morgan Stanley and Bank of America.


While the recession might not hit this year, the gloom and doom are here. You know the economy isn’t rosy when the Federal Reserve suddenly pulled the hand-brake and signalled that no more rate hikes will be coming this year. That was an incredible U-turn made by the Fed last month, just three months after the central bank said 2019 would be slapped with at least two hikes.


The decision to hold interest rates steady was unanimous, suggesting that the Federal Reserve was as terrified as President Donald Trump that the situation was so fragile that any more rate hike would wreck havoc in the U.S. economy. Federal Reserve Chairman Jerome Powell had gone against the wishes of Trump last year when he increased four times the interest rates in 2018.

President Donald Trump with Fed Chairman Jerome Powell

The sudden change in direction was primarily due to expectations of a lower GDP growth in the United States. The Fed now sees economic gains of just 2.1% this year, down from the 2.3% estimate in December. Inflation is expected to hit 1.8%, while the unemployment rate for this year is now seen at 3.7%, up 0.2 percentage points from December.


The Federal Reserve said economic activity “has slowed” even though the labour market remains “strong”. Hence, it wasn’t a surprise when Ronit Ghose, the global head of banks research at Citigroup, said that the earnings results for this quarter is probably the sector’s best for the year – largely due to the Federal Reserve’s decision to refrain from hiking at rates.


In essence, the freeze in interest rate hike this year will cripple the banking industry’s ability to generate higher profits in the coming months. “When we look at profitability, particularly net interest margins … we think we’re at peak margins right now. If we don’t see more rate rises, which is likely … that’s not great news for margins going ahead,” – said Ghose.

Federal Reserve - Building

Goldman Sachs seems to agree with Citigroup. Peter Oppenheimer, Goldman Sachs’ chief global equity strategist, said – “We do think that earnings growth is going to be quite weak this year in all of the major markets. So having seen the rebound that we’ve had already, much is going to depend now on how far earnings can grow, and I think that’s going to be quite modest.”


In short, Goldman thinks investors can expect weak earnings growth across all major markets in 2019. It also expects a recovery at a quarterly level during the second-half of the year, both in the U.S. and globally. Oppenheimer said – “We do think global activity will improve in the second-half of the year, even in Europe which has really lagged behind.”


Earlier this month, the IMF (International Monetary Fund) cut its outlook for global growth to the lowest since the 2008 financial crisis. The fund said the world economy will grow 3.3% this year, a spectacular decrease from the 3.5% it had forecast for 2019 in January. Interestingly, it was the third time the IMF has downgraded its outlook in a short period of six months.

Gloom and Doom - Signboards

Although the Federal Reserve has put interest-rate hikes on hold, the IMF warns that risks are still skewed to the downside, with multiple threats terrorising the global economy, including the possible collapse of negotiations between the U.S. and China to end their trade war. Of course, there is always the possibility that Britain may exit the European Union without a deal to ensure a smooth transition.


Besides cutting the world economy’s growth, the IMF has also cut its forecast for U.S. growth to 2.3% this year, down 0.2 percentage points since the fund’s last global outlook in January. The fund cut its outlook for U.K. growth to 1.2% this year, down 0.3 points from three months ago. However, the IMF raised its forecast for China’s growth by 0.1 points to 6.3% this year.


Today (April 16), several European Central Bank (ECB) policymakers expressed doubt about a projected growth recovery in the second half of the year. In fact, the policymakers think it’s own economic projection earlier has been too optimistic. This pours cold water to the Goldman Sachs’ expectation that a recovery could happen during the second-half of the year.

Goldman Sachs - Logo on Trader Shirt


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