S&P 500 2019 Earnings Preview: Higher Global Exposure = Lower Earnings & Sales Growth

As of December 21, the estimated earnings growth rate for CY 2019 is 7.9%. All 11 sectors are projected to report year-over-year growth in earnings, led by the Industrials, Consumer Discretionary, Energy, and Financials sectors.

The Industrials sector is expected to report the highest (year-over-year) earnings growth of all 11 sectors at 11.4%. At the industry level, 11 of the 12 industries in the sector are projected to report earnings growth. Seven of these 11 industries are predicted to report double-digit growth, led by the Construction & Engineering (26%) and Airlines (22%) industries.

The Consumer Discretionary sector is expected to report the second highest year-over-year earnings growth at 9.8%. At the industry level, nine of the 11 industries in this sector are projected to report earnings growth, led by the Leisure Products (353%), Internet & Direct Marketing Retail (26%), and Textiles, Apparel, & Luxury Goods (13%) industries. The Diversified Consumer Services (-10%) and Automobiles (-4%) industries are the only two industries expected to report a year-over-year decline in earnings for the year.

The Energy sector is expected to report the third highest (year-over-year) earnings growth of all 11 sectors at 9.7%. At the sub-industry level, all six sub-industries in the sector are projected to report earnings growth: Oil & Gas Drilling (278%), Oil & Gas Refining & Marketing (29%), Oil & Gas Equipment & Services (23%), Oil & Gas Storage & Transportation (14%), Oil & Gas Exploration & Production (4%), and Integrated Oil & Gas (4%).

The Financials sector is expected to report the fourth highest year-over-year earnings growth at 9.5%. At the industry level, all five industries in this sector are projected to report earnings growth, led by the Insurance (14%) and Banks (11%) industries.

CY 2019 Revenue Growth

The estimated (year-over-year) revenue growth rate for CY 2019 is 5.3%. All 11 sectors are expected to report year-over-year growth in revenues, led by the Communication Services and Health Care sectors.

The Communication Services sector is predicted to report the highest (year-over-year) growth rate of all 11 sectors at 10.5%. At the industry level, all four industries are expected to report revenue growth, led by the Interactive Media & Services (21%) industry.

The Health Care sector is expected to report the second highest (year-over-year) revenue growth of all 11 sectors at 7.8%. At the industry level, all six industries in this sector are predicted to report revenue growth, led by the Health Care Providers & Services (9%) and Health Care Technologies (8%) industries.

Higher International Exposure = Lower Estimated Earnings & Revenue Growth in CY 2019

Heading into 2019, there are concerns in the market about the stronger U.S. dollar and slower international economic growth. Given these concerns, are S&P 500 companies with higher international revenue exposure expected to underperform S&P 500 companies with lower international revenue exposure in terms of earnings growth and sales growth in CY 2019?

The answer is yes. FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) can be used to answer this question. For this analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (less international exposure) and companies that generate less than 50% of sales inside the U.S. (more international exposure). Aggregate earnings and revenue growth rates were then calculated based on these two groups.

The earnings growth rate for the S&P 500 for CY 2019 is 7.9%. For companies that generate more than 50% of sales inside the U.S., the earnings growth rate is 8.4%. For companies that generate less than 50% of sales inside the U.S., the earnings growth rate is 6.9%.

The sales growth rate for the S&P 500 for CY 2019 is 5.3%. For companies that generate more than 50% of sales inside the U.S., the sales growth rate is 5.6%. For companies that generate less than 50% of sales inside the U.S., the sales growth rate is 4.7%.

Record-High Net Profit Margin (11.8%) Projected for 2019

Despite concerns about rising costs, the estimated net profit margin (based on aggregate estimates for revenues and earnings) for the S&P 500 for 2019 is 11.8%. If 11.8% is the actual net profit margin for the index, it will mark the highest (annual) net profit margin for the index since FactSet began tracking this metric in CY 2008. Eight of the 11 sectors are projected to see higher net profit margins in CY 2019 relative to CY 2018.

Key Themes to Watch in 2019

Here are some of the key themes to watch for 2019 that could impact earnings and revenue growth expectations:

• Foreign Exchange Rates: The U.S. dollar shifted from a tailwind to a headwind during the course of 2018, as the U.S. dollar strengthened relative to a number of currencies. On Q3 earnings calls, 20 of the 30 companies in the Dow 30 cited a negative impact from the stronger dollar. What are exchange rates in 2019?
• Rising Costs: Several S&P 500 companies have discussed rising costs (including raw materials, wages, and transportation costs) on earnings calls in 2018. Do costs continue to rise and pressure profit margins in 2019?
• Rising Interest Rates: Will the Fed continue to raise interest rates in 2019?
• Oil Prices: Oil prices have declined substantially over the past few months. The Energy sector is expected to report the third highest earnings growth in the index in 2019, and future EPS estimates for Energy sector companies are highly correlated to oil prices. Where do oil prices go from here?
• Slower International Economic Growth: GDP growth in Europe and China is expected to be lower in 2019 relative to 2018. S&P 500 companies with higher international revenue exposure are already expected to underperform S&P 500 companies with lower international revenue exposure in terms of earnings growth and sales growth in CY 2019. Does this gap widen in 2019?
• Escalating Tariffs: In Q3, roughly 30% of S&P 500 companies discussed tariffs on earnings calls. Generally speaking, most companies stated that current tariffs were “manageable.” If tariffs continue to escalate, do more companies see a negative impact from tariffs?