The outlook for third-quarter corporate profits is darkening, a threat to further derail a stock market that is already off to the worst start to a quarter since 2016.
A flurry of earnings reports in coming weeks will mark the latest test for stocks after a rocky stretch of economic data exacerbated worries that a global manufacturing slowdown is trickling into the U.S.
Jitters about the economy have pushed the S&P 500 down 0.8% to start the fourth quarter, its weakest performance to start a quarter since January 2016. The index is up 18% for 2019 but is nearly flat for the previous 12 months—a period that includes last fall’s brutal selloff and this year’s bounceback.
Investors expecting a strong earnings season to propel stocks out of this malaise could be in for disappointment.
Dozens of companies have tried to temper investor expectations ahead of coming reports, saying earnings will come in lower than analysts had expected, according to FactSet.
Tyson Foods Inc.
are among the companies that have moderated expectations recently.
Analysts expect earnings for companies in the S&P 500 to fall about 4% for the third quarter, according to FactSet data, in what would mark the biggest year-over-year drop since 2016. In recent months, Wall Street analysts have lowered their earnings expectations for all 11 sectors in the S&P 500, from energy to technology.
“If I had to tattoo something on my arm, it would be ‘stocks chase earnings,’” said
director of research at FBB Capital Partners. “We’re a little more cautious than we were even a couple weeks ago.”
Data last week showed domestic factory activity hit a 10-year low in September, while the services sector expanded at the slowest pace in three years. Friday’s jobs report eased some of those fears, showing that the U.S. labor market is a relative bright spot, with unemployment hitting a 50-year low.
A gloomy economic outlook isn’t the only headwind for big corporations. The U.S. dollar has rallied this year, potentially making it more difficult for companies with large international businesses to profit from shoppers abroad. Also in the mix is a prolonged trade conflict with China and worries over how it might dent an already slowing U.S. economy.
Mr. Bailey said he has been looking to buy shares of companies that could fare better in an economic downturn, while unloading exposure to those that could be caught in the trade war between the U.S. and China, like
Microchip Technology Inc.
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Although trade tensions have lately taken a back seat to other growth concerns, investors are watching for signs of their impact on businesses. The term “tariff” was mentioned on earnings calls more frequently in the second quarter than in the first, according to FactSet, a trend that could continue. U.S. leaders are set to resume talks with their Chinese counterparts this coming week.
warned last month that it expects profits for July and August to be weaker than last year. Its Macau casino business has been hurt by “a variety of factors in the region, including the continuing trade dispute between the U.S. and China and disruptions in Hong Kong,” according to a company disclosure.
Acuity Brands Inc.
said Wednesday that sales volumes fell 16% in its latest quarter. Chief Executive
pointed to “a number of market shocks, including the addition of significant tariffs placed on Chinese-made components and finished goods, uncertainty created by the threat of further trade actions and labor shortages in key markets” on the company’s earnings call. Shares slumped 11%, one of their biggest single-day drops of the past decade.