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Earnings season could be a head-fake for the markets: analyst

Scott Saloway
·Producer

As earnings season kicks off, one prominent stock analyst warns that the likely cascade of positive earnings results doesn’t mean all is right with the economy.

“Of course, we’ll beat expectations for third quarter earnings, we always do,” Matt Maley, chief market strategist at Miller Tabak + Co, told Yahoo Finance’s The First Trade. “They lower them enough that the actual numbers are beaten. The key thing is that guidance has been coming down all year long.”

Wall Street is expecting a 3% earnings decline in Q3 versus a year ago, which would mark the first year/year decline in quarterly EPS since 2Q 2016 and since 2Q 2009 when the Energy sector is excluded. Goldman Sachs analysts blame compressing margins “in every sector,” writing that “excluding Financials and Utilities, S&P 500 margins are expected to contract by 108 bp, more than offsetting forecast sales growth of 5%.”

Maley predicts that’s likely to trickle down to stocks.

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“The last time we had an earnings recession, in 2015, the stock market was flat,” he told Yahoo Finance’s Brian Sozzi. “But now we’ve got an S&P that’s up 18%, and we’re down with almost flat earnings growth. It just doesn’t compute. And I think we’re probably going to have to see some weakness in the 4th quarter.”

FILE - In this Aug. 15, 2014, file photo, a lighted sign marks the Goldman Sachs trading post on the floor of the New York Stock Exchange. (AP Photo/Richard Drew, File)
Goldman Sachs is one of the major banks reporting earnings this week. (AP Photo/Richard Drew, File)

One area to especially keep an eye on is banking, typically considered a bellweather for the state of the U.S. economy. JPMorgan Chase (JPM), Citigroup (C), and Goldman Sachs (GS) are all reporting on Tuesday.

“Interest rates have moved up off their lows. The question is how much higher are they going to go,” Malley said. “If the yield curve can indeed start to steepen considerably and if interest rates can move higher, that’s going definitely to be bullish for bank stocks and help them finally outperform.”

But given the slowdown in global growth and pressure from the trade war, Maley is skeptical that is going to happen any time soon.

The trade war “is going to be with us for a long time,” Maley said. “How much upside can we really have when this issue really isn’t going to go away?”

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