Q:You got some sort of downbeat prediction here about earnings for the full year. What’s that?
One, you continue to see labor’s share of national income accelerate. And it’s likely to continue accelerating through the end of this economic cycle.
Two, you have a very, very tough annualized dollar comparison. So right now, we have the U.S. dollar, which obviously half of the S&P 500 revenues and EPS are roughly obtained from abroad. We have that up 9% year-over-year in Q1, and potentially up 6%,7% year-over-year in Q2.So that’s obviously a headwind as well.
And then obviously, you have global growth continue to decelerate. So domestic economic growth is likely to continue to decelerate at least through Q3 of 2019. When you have Chinese economic growth hitting its nadir here in Q1 and European growth potentially teetering into recession.
Q: Ok. But you’ve got a lot of people scratching their heads about this prediction for a shallow earnings recession.You know, when you see about results, so far they are pretty solid.
Obviously, we’re not going to see the the double-digit gains that we saw last year. What quarter do you see things sort of start to crater in the earnings world?
A: Well. So again, I liken this to Procter & Gamble raising their guidance today. You go back to this time of last year. You had Caterpillar beat and raise guidance, and only a month later, come back to revise their earnings estimates for the full year.
That’s something we can actually see. You’re going to see some of these key headwinds really all coalesce here in Q1, which we obviously won’t start to get there results till April.
Q: Ok. So your outlook for GDP, it seems pretty downbeat. How related to that is it to the government shutdown?
A: None. None, absolutely. The government shutdown is having a very negligible impact on growth. What we’re seeing in the U.S. economy domestically is just a return to more normalized levels of growth off the difficult comparisons that we just sort of put up in 2018.
China has a myriad of structural headwinds that continue to weigh on growth, not the least of which is obviously these trade concerns in the U.S. But it’s far from trade. It’s obviously a myriad of things that we’ve been discussing with our clients. And then obviously, Europe potentially going into recession is obviously a key headwind as well.
Q: What do you see are the biggest risks to the market right now?
A: global growth decelerating, a potential shallow earnings recession are two pretty big things that I don’t think investors are pricing in at this level of S&P.