An offsetting impacts on the economic outlook after three major policy moves in July and August. The U.S. economy for the next three quarters looks slightly weaker now. There is no surprise that the current forecast looks a little different than the last forecast, which has made financial markets more volatile.
let us take a look at what policymakers were up to instead of relaxing on the beach or hiking in the mountains.
1. The decision of the Fed rate cut for the second time in a widely expected move meant to sustain a decade-long economic expansion but gave mixed signals about what may happen next and announced that it would take down its benchmark overnight lending rate to a target range of 1.75% to 2%. Jerome Powell said it as a temporary operation for relieving funding pressures and expecting the federal funds rate to move back into the target range. He also remarked that the rate cut can create turmoil in money markets but will not carry any implications for the economy or the stance of monetary policy.
2. The budget resolution which was agreed by the congress along with a hike in the debt ceiling, for two years.
3. The next policy is prolonged trade war policy. Tariff hike by US administration on Chinese good also made an impact on the economic outlook.
Bond yields have dropped by almost a full percentage point and made the bond market is more troubling. While the US economy seems to be continuing its record expansion, growth is slowing in the rest of the world. Some of the major countries in Europe may already be in recession, and China’s growth slowdown is likely to continue.
let us take a look at the sector.
The household sector has provided an underpinning of steady growth for the US economy over the past few years. Consumer spending has grown steadily even as business investment weakened, exports faced substantial headwinds, and housing stalled. But that’s unsurprising since job growth has remained quite strong. Even with relatively low wage growth, those jobs have helped put money in consumers’ pockets, enabling households to continue to increase their spending. The continued steady (if modest) growth in house prices has helped, too, since houses are most households’ main form of wealth.
The housing market has weakened. Housing starts at the current level of around 1.2 to 1.3 million may be able to meet the needs of the population, limiting the upside to the sector. We created a simple model of the market based on demographics and reasonable assumptions about the depreciation of the housing stock; it suggests that housing starts are likely to stay in the 1.1–1.2 million range. Starts are likely to fall as the economy weakens in the next year or two, and then gradually increase over the five-year horizon. Housing remains a smaller share of the economy than it was before the Great Recession, and that’s to be expected. In some ways, it’s a relief to see the sector return to “normalcy.” But with slowing population growth, housing simply can’t be a major generator of growth for the US economy in the medium and long run.
89% of Companies Have Seen a Decline in Q3 EPS Estimates since June 30. The Energy sector has recorded the largest decrease in expected earnings growth since the start of the quarter. This sector has also witnessed the largest decrease in the price of all eleven sectors since June 30. Overall, 25 of the 28 companies (89%) in the Energy sector have seen a decrease in their mean EPS estimate during this time. Of these 25 companies, 16 have recorded a decrease in their mean EPS estimate of more than 10%, led by Noble Energy, Hess Corporation, and Apache Corporation. However, Exxon Mobil, Chevron and Occidental Petroleum have been the largest contributors to the decline in expected earnings for this sector since the start of the quarter. The stock prices of all three companies have decreased since June 30.
72% of Companies Have Seen a Decline in Q3 EPS Estimates since June 30. The Consumer Discretionary sector has recorded the second-largest decrease in expected earnings growth since the
start of the quarter. Despite the decrease in expected earnings, this sector has witnessed an increase in the price of 1.5% since June 30. Overall, 44 of the 61 companies in the Consumer Discretionary sector have seen a decrease in their mean EPS estimate during this time. Of these 44 companies, 13 have recorded a decrease in their mean EPS estimate of more than 10%, led by Macy’s, L Brands, Under Armour, and Amazon. Amazon and Ford Motor have been the largest contributors to the decrease in expected earnings for this sector since the start of the quarter. The stock prices of both companies have decreased since June 30.
Materials: 82% of Companies Have Seen a Decline in Q3 EPS Estimates since June 30.
The Materials sector has recorded the third-largest decrease in expected earnings growth since the start of the quarter. This sector has also witnessed the third-largest decrease in the price of all eleven sectors since June 30 at -0.1%. Overall, 23 of the 28 companies (82%) in the Materials sector have seen a decrease in their mean EPS estimate during this time. Of these 23 companies, 9 have recorded a decrease in their mean EPS estimate of more than 10%, led by Mosaic, Freeport-McMoRan, and International Paper. International Paper and Mosaic have also been the largest contributors to the decrease in expected earnings for this sector since the start of the quarter. The stock prices of both companies have decreased since June 30.
In terms of estimate revisions for companies in the S&P 500, analysts have made cuts to EPS estimates at average levels for Q3 2019 to date. On a per-share basis, estimated earnings for the third quarter have fallen by 3.3% since June 30. This percentage decline is equal to the 5-year average (-3.3%) for a quarter, larger than the 10-year average (-3.1%) for a quarter, and smaller than the 15-year average (-4.3%) for a quarter. However, a larger percentage of S&P 500 companies have lowered the bar for earnings for Q3 2019 relative to recent quarters. Of the 113 companies that have issued EPS guidance for the third quarter, 82 have issued negative EPS guidance and 31 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 73% (82 out of 113), which is above the 5-year average of 70%.
For Q3 2019, the estimated earnings decline for the S&P 500 is -3.8%. If -3.8% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year earnings declines since Q4 2015 through Q2 2016.