High Expectations

The third quarter 2018 earnings reports begin in earnest at the end of this week. According to Thomson Reuters, corporations expect their earnings to grow 21.6% above last year’s level. This is lower than the 24.9% rate of growth in the second quarter of 2018. There is a growing concern that while earnings are expected to grow, they may not grow as fast as analysts expect. This is because the labor market is tight and is getting tighter. The unemployment rate is now at a 49 year low of 3.7%. The tight jobs market is pushing labor costs higher. It also makes finding skilled workers harder. In addition, tariff related costs may be higher than expected, which could hurt corporate profits. Another reason for earnings growth to slow down is because more companies have issued warnings on earnings compared to positive preannouncements. The negative-to-positive preannouncement for the third quarter is at 2 which means that two companies have lowered their earnings guidance for every company that has increased their guidance. If corporate profits begin to slow down there is concern that stock prices could drop. That is why we will be watching the earnings numbers very closely.

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