Typically, the holiday season presents a joyous moment for the markets on a substantive basis. With businesses borrowing money to ramp up for manic shoppers, the fourth quarter is the chance to deliver the goods. But with the upcoming earnings reports, investors should probably brace for disappointing results.
According to the latest report from The Wall Street Journal, a string of downgraded profitability expectations has worried analysts. Prior headwinds that began to impact sentiment last year, unfortunately, stuck around longer than corporate leaders anticipated. Further, few indicators suggest that the markets can rise above the doldrums anytime soon.
Primarily, the upcoming earnings reports mostly have a China problem. The ongoing trade war between the top two economies in the world have rattled both corporate executives and shareholders. An initial thawing in relations turned out to be a head-fake when controversies like the Huawei arrest returned an icy chill to the narrative.
On a related note, the trade war throws more variables into an already unstable geopolitical environment. Other countries besides the U.S. must respond to the changing circumstances. Moreover, President Trump hasn’t done a great job solidifying relationships with our allies. As a result, friendly nations have the potential of becoming economic rivals, further pressuring upcoming earnings reports.
Finally, poor timing hurts Wall Street. Over the last few years, the benchmark indices have enjoyed record-breaking growth. But the tailwind that we’re the best block in the worst neighborhood has died down. Now, investors seek substance. From their perspective, they’re not getting it, adding to the overall bearishness.
Naturally, almost every company is absorbing some pain. Here are ten upcoming earnings reports that are at risk for posting decelerating profits:
Bank of America (BAC)
No matter what the situation is for the economy or the investment sector, you must always pay attention to the big banks. As economic bellwethers, you can make a reasonable forecast on how Wall Street will perform based on their earnings reports.
Unless you’re shorting the broader markets, Bank of America’s (NYSE:BAC) fourth-quarter 2018 earnings report will likely disappoint you. Originally slated for an earnings per share of 63 cents, BAC stock will be lucky if it gets anywhere close.
According to Investor’s Business Daily, a host of problems — including the challenges I mentioned above — will pressure the banks. Currently, BAC stock has benefitted from higher interest rates and tax cuts. However, those factors have likely been baked into the share price.
At any rate, BofA’s upcoming earnings report is extremely critical because it concentrates mostly in the U.S. Its performance could make or break other companies.
Morgan Stanley (MS)
Under any other circumstance, Morgan Stanley’s (NYSE:MS) upcoming earnings report suggests a high probability of success. The last time MS stock missed the mark was back in Q3 2015. Otherwise, shareholders can depend on an earnings beat, and usually a very strong one.
I’m not suggesting that MS stock will miss in Q4. However, it’s a very real possibility. As is the case with BofA, one wonders how long the low-hanging fruit can sustain Morgan Stanley. Especially in a deflated environment, investors want to hear more than just “tax cuts” or “interest rates.”
Further, Morgan Stanley obviously features an extensive brokerage business. Even in a bull market, this is a challenging venture due to millennials not embracing equity investments. But with the major indices tanking like they have? The timing couldn’t be worse.
Speaking of low-hanging fruit, we’ve got to talk about Apple (NASDAQ:AAPL). Among all upcoming earnings reports, AAPL stock levers the most influence in the global markets. When the vaunted consumer-electronics firm revealed that the trade war had hurt its iPhone sales, the Street responded poorly.
But I’m not here to harp on past disclosures. First, I want to know just how bad of a miss we’re talking about and the greater context. I agree with InvestorPlace market strategist William Roth, who stated that CEO Tim Cook blaming China is a cop-out. As Roth put it, “If you make an innovative product, Chinese consumers will buy it anyway.”
And that’s where my concern lies. Without Steve Jobs, Apple has lost its core catalyst, which only invites lurking competitors. Management better have a good story to tell. Otherwise, AAPL stock may have further to fall.
Skyworks Solutions (SWKS)
Logically, if Apple is taking a turn for the worst, it follows that the company’s suppliers will face similar distress. That’s the case for Skyworks Solutions (NASDAQ:SWKS). Since the start of last year, SWKS stock has dropped an agonizing 26%.
Not surprisingly, Skyworks recently announced a guidance cut for its upcoming earnings report. Previously, management forecasted revenues between $1 billion to $1.02 billion, and EPS of $1.91. Now, the Apple parts supplier is looking at sales of $970 million, and EPS between $1.81 and $1.84.
More critically, I think we can expect SWKS stock to remain under pressure throughout most of this year. The concept of “peak smartphone” — something that I’ve warned about years ago — is finally impacting the markets. Unfortunately, companies like Skyworks rely on volume. If Apple and its competitors aren’t driving unit sales, SWKS will need serious help.
Union Pacific (UNP)
In recent years, railroad operator Union Pacific (NYSE:UNP) has pleasantly surprised investors. Despite its rather archaic business, railroading represents a critical component of our transportation network. Additionally, this year looks like a favorable one for UNP stock thanks to a new executive hiring.
I’d use the enthusiasm to take profits off the company ahead of its upcoming earnings report. Since the October meltdown, UNP stock has gyrated wildly. More importantly, shares could take on a decidedly negative tone if Union Pacific fails to meet profitability expectations.
One of the biggest worries here is declining coal volumes. Despite President Trump’s campaign rhetoric to bring back coal, that promise has fallen flat. According to Reuters, more coal plants closed their doors under Trump’s first two years than former President Obama’s first term.
I don’t see this situation changing due to cleaner alternatives to coal. Without another sector to pick up the slack, UNP could disappoint among high-profile earnings reports.
Knight-Swift Transportation (KNX)
In many ways, the trucking industry is a real-time bellwether for the underlying economy. Indeed, it could be more accurate than the big banks. After all, if consumers aren’t buying goods, you’ll see an equivalent decline in trucking demand.
If that’s the case, the falling price for Knight-Swift Transportation (NYSE:KNX) shares isn’t a great sign. Since the beginning of 2018, KNX stock has dropped more than 34%, which is an alarming figure. In addition, the U.S. has likely reached maturity in trucking demand.
This sets up an interesting situation ahead of the transportation giant’s upcoming earnings report. According to industry data, last year saw a record in freight-hauling demand. We’re probably not going to see a repeat performance considering the trade war and other retail headwinds. Therefore, I’d stay on the sidelines for KNX stock.
J B Hunt Transport Services (JBHT)
Among upcoming earnings reports, I’m worried most about transportation. In other sectors, particularly banking, you can fudge the numbers to present the best possible image. But with transportation, it’s a binary reality: either you’re moving products, or you’re not.
The problems that Knight-Swift is facing is not unique to the company. Another big name in the arena, J B Hunt Transport Services (NASDAQ:JBHT), is also taking it in the chin. While JBHT stock had a relatively strong start to 2018, the October selloff really hurt the organization. Over the past three-and-a-half months, shares have tanked more than 18%.
A major headwind that hurts the transportation industry’s future earnings reports is recruitment. Simply put, nobody wants to be a truck driver. Therefore, to keep the drivers JBHT and its competitors have, they must provide incentives.
Trucking is one of the rare job markets where the employees make the rules. However, that doesn’t do favors for JBHT stock in terms of profitability.
Out of the major earnings reports set for release, Caterpillar (NYSE:CAT) has hit the most branches from the ugly tree. CAT stock never gained traction last year as the markets absorbed increasingly bearish news. This year, the iconic industrial giant doesn’t have many options to exercise.
Primarily, the trade war represents the most worrying impediment. A recent report from Singapore Business Review indicated that China’s construction industry will expand nearly 6% this year. If true, that’s a lost opportunity that CAT stock can ill afford. Ironically, management has its staunch supporter President Trump to thank.
The former real-estate mogul and reality-TV star also boasted about “building the wall.” We’re now in a dubiously unprecedented government shutdown because of this contentious issue. From Caterpillar’s perspective, the wall is a pipe dream. This hurts longer-term prospects, casting a cloud on the upcoming earnings reports.
DR Horton (DHI)
The crazy real-estate market probably won’t impact homebuilder DR Horton’s (NYSE:DHI) upcoming earnings report. But that doesn’t give investors justification to dismiss the problems brewing over the horizon.
Over the past two years, housing prices have gone ballistic. This is especially the case for popular destination regions like Southern California. At one point, you could find affordable homes thanks to the recovery phase from the Great Recession. Today, even the cheap homes are out of reach for average income earners.
That’s a huge problem for DHI stock, particularly because its core industry has a demographic problem. Most millennials were too young to participate in the housing discount shortly after the 2008 crisis. But just as they were about to pull the trigger, prices skyrocketed. This dynamic has created what Fortune’s Shawn Tully called a “lost generation” of home buyers.
Essentially, housing’s boom-bust cycles have created fiefdoms throughout America. While this setup benefits the rich, the wealth imbalance is bad news for DHI stock.
In our high school yearbook, my classmate and football teammate David wrote that between Ford Motor (NYSE:F) and Chevy, it was no comparison — you always went with Chevy.
As an immigrant, I must admit that I’ve always been confused why Americans buy American cars. To me, the Ford and Chevy debate is akin to choosing between lethal injection and the gas chamber. If at all possible, I’d rather have a third option.
Apparently, I’m not alone in my thinking process. After decades of disappointing sales that limited upside potential in F stock, management has mostly given up on cars. Moving forward, Ford will stick with what it does best: big trucks and SUVs.
I can see this as a recipe for nearer-term success. But if customer tastes change, not having the mainstay sedan is a deal-breaker for F stock in the long run.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.