“If earnings are weak again, I don’t think stocks are going to look through that this time.” Michael Wilson
Morgan Stanley’s chief equity strategist Michael Wilson says the Federal Reserve’s Wednesday decision underlined the central bank’s uber-dovish stance, which means corporate earnings are going to be paramount for stock-market investors.
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Speaking to CNBC on Thursday morning, the strategist said the Fed statement was “kind of the full capitulation” by the Federal Open Market Committee, after it left rates unchanged, as expected, but also cut its projection for future rate increases this year to zero from two back in December and downgrading its 2019 economic outlook for gross domestic product to 2.1% from 2.3%.
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The move comes after policy makers in January said they would pause further increases, suggesting that they feared weakening growth outside of the U.S. have the potential to harm domestic expansion.
Wilson said against that back drop, quarterly results could be a key catalyst this time.
Part of the problem is that corporate tax cuts enacted late 2017 helped to boost results last year but the effects of that stimulus, which resulted increased buybacks, is expected to fade. That could make comparisons to earlier quarters look worse. On top of that, some corporate executives say a slowdown in global growth is already cutting into results.
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Package-delivery giant FedEx Co. FDX, +1.45% for example, reported fiscal third-quarter profit and revenue on Tuesday that missed expectations, and cut its full-year earnings outlook, citing slowing international economic conditions and weaker global trade growth.
“[First-quarter] 2019 certainly is up against tougher comparisons as we cycle tax reform and other fiscal stimulus, so it would be natural to see a sharp reduction from the 23% [Earnings per share, or EPS] growth of 2018," Lindsey Bell, investment strategist at CFRA, told MarketWatch.
Expectations for Q1 EPS is for a decline of 2.2%, she said, adding that expectations for EPS growth were reduced by 5%, as of the start of 2019.
That said, Bell says she is betting that earnings will outperform expectations.
If they don’t, however, Wilson believes that the markets could get knocked from their perch.
Thus far in 2019, the Dow Jones Industrial Average DJIA, +0.71% is up 10.7%, the S&P 500 SPX, +0.81% has climbed 13.2% so far this year, while the Nasdaq Composite Index COMP, +0.99% has advanced 17.3% in the first 11 weeks of the year. Those gains come after an ugly finish to 2018, partly driven by the perception that the Fed was tightening monetary policy too aggressively and that U.S.-China trade negotiations failed to show sufficient progress.
For Wilson’s part, he believes that “earnings will be paid for,” he told CNBC.
Back in July, Wilson predicted the market would see its largest correction in months, with the rally showing signs of “exhaustion.” He wrote then: “The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February.”
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