Thought of the week

2019 earnings estimates have fallen by -3.0% since the beginning of the year, roughly twice as much as the -1.5% decline seen on average during similar time periods throughout this expansion. This has been particularly harmful to 1Q19 earnings estimates, which have come under pressure and are now suggesting that the first quarter will see earnings contract on a year-over-year basis for the first time since 2Q16. That said, and as shown in this week’s chart, analyst estimates tend to be overly pessimistic for the two nearest quarters, and overly optimistic for the quarters beyond that. In other words, earnings estimates for 4Q19 and beyond are likely too high, but 1Q19 earnings should not fare as poorly as analysts currently expect. In fact, once historical biases are taken into account, we expect 1Q19 earnings growth will shake out in positive territory. That said, investors should prepare for greater downside risk and higher volatility by looking to sectors that have historically generated more of their total return from dividends, but are not overly sensitive to changes in interest rates. In our view, there are opportunities in certain sectors – financials, industrials, energy and materials – that can help to achieve this desired outcome.