The federal government has confirmed that growth of the U.S. economy slowed in the second quarter from the first period. Still, at an estimated 2.1% increase in gross domestic profit (down from 3.1% in the first period), the economy continues to chug along nicely—especially compared to the rest of the world.
However, security analysts living through the deceleration apparently decided the sky was falling. They slashed profit forecasts for companies right and left. As a result, the predicted median of per-share earnings growth for the Barron’s 400 fell to its lowest level in many quarters. So low, in fact, that the financially fit companies in the Barron’s 400 aren’t officially expected to expand profits any more than those in the S&P 500.
| Median 2Q 2019 Estimate vs. Median 2Q 2018 Actual | ||
| EPS | Revenue | |
| Barron’s 400 | 3.11% | 4.71% |
| S&P 500 | 3.11% | 2.89% |
Aside from the computational coincidence in per-share earnings growth, the interesting thing about these forecasts is that they imply the growth-oriented companies in the Barron’s 400 will do less well than the S&P 500 in converting revenue growth to increased per-share profit. A dubious proposition, indeed.
To see how aggressively the machetes chopped, look no further than the serious change in median per-share profit estimates over the past six months.
| Median Estimates Over Past Six Months | ||
| EPS | Revenue | |
| Barron’s 400 | -96.44% | -0.52% |
| S&P 500 | -97.35% | -2.74% |
These numbers are silly. It’s not credible that per-share profit could fall that much with barely a blip in revenue. Obviously, the analysts were fixated on only one thing, which calls into question their entire predictive process.
There appear to be some screwy forecasts at the sector level as well. For example, in eight sectors the Barron’s 400 companies again are expected to grow less profit with more sales. For the S&P 500, that forecast holds for six sectors. Another oddity is the steep decline in profit for the Barron’s 400 in the materials sector, compared to the S&P 500. However, the materials companies that are components of the Barron’s 400 are almost wholly different than those in the S&P 500.
| Median 2Q 2019 Estimate vs. Median 2Q 2018 Actual | ||||
| Earnings per Share | Revenue | |||
| Barron’s 400 | S&P 500 | Barron’s 400 | S&P 500 | |
| Consumer Discretionary | 2.62% | 2.10% | 6.01% | 2.69% |
| Consumer Staples | -9.51% | -2.05% | 3.99% | 0.92% |
| Energy | -1.94% | -2.89% | 5.94% | -0.43% |
| Financials | 6.44% | 3.90% | 5.16% | 3.43% |
| Health Care | 5.83% | 5.53% | 6.94% | 3.73% |
| Industrials | 3.11% | 5.93% | 4.46% | 3.47% |
| Materials | -31.05% | -1.00% | -1.67% | 1.64% |
| Technology | 0.00% | 0.87% | 4.22% | 3.53% |
| Telecommunications | N.A. | -0.37% | N.A. | 0.65% |
| Utilities | 0.02% | -1.45% | 7.20% | 1.80% |
In terms of company size, the standout feature is the predicted profit slump for small and micro-capitalization companies. Whether it turns out to be as bad as expected remains to be seen. For both indexes, mega-cap companies continue to be the driver of whatever growth is forecast.
| Median 2Q 2019 Estimate vs. Median 2Q 2018 Actual | ||||
| Earnings per Share | Revenue | |||
| Barron’s 400 | S&P 500 | Barron’s 400 | S&P 500 | |
| Mega Cap (>$10 billion) | 5.96% | 4.02% | 6.36% | 3.32% |
| Large Cap ($3 bln-$10 bln) | 3.14% | -4.34% | 3.35% | 0.50% |
| Mid Cap ($1 bln-$3 bln) | 2.53% | N.A. | 4.72% | N.A. |
| Small Cap ($500m-$1 bln) | -9.31% | N.A. | 1.05% | N.A. |
| Micro Cap (< $500 mln) | -21.82% | N.A. | 3.87% | N.A. |
With guidance this questionable, we don’t know what this earnings-report season will deliver. We wager, however, that the Barron’s 400 will exceed these overwrought expectations.
