After a Dismal 2018, What Else Can Go Wrong in 2019?

QMA provides insights into risk factors that could potentially lead to 0% U.S. earnings growth in 2019.

January 16, 2019

The year 2018 turned out to be a very rough one for financial markets. In terms of losses, investors have definitely seen worse, but in terms of the breadth of assets failing to deliver decent returns, the year is a potentially historic one. Even in 2008, the depth of the Global Financial Crisis, there were a handful of asset classes with positive returns that beat U.S. inflation. In 2018, REITs and non-U.S. government bonds were the only two. Dismal returns have combined with a significant pickup in volatility, only adding to the unpleasantness. Will 2019 bring us a return to more placid and pleasant times, or are treacherous markets likely to stay with us as the calendar turns?

Few places to hide in 2018

YTD returns as of 12/14/2018

Asset Class

YTD Returns



FTSE WGBI Non-U.S. Gov't (Hedged)


3-Month T-Bill


FTSE WGBI Non-U.S. Gov't (Hedged)


Bloomberg Barclays High Yield


S&P Global Ex-U.S. REIT


S&P 500


Bloomberg Barclays Aggregate Bond


FTSE WGBI Non-U.S. Gov't (Unhedged)


Gold (USD/Oz)




Bloomberg Commodity Index






Source: QMA, FactSet. Past performance is not a guarantee or reliable indicator of future results.

In its 2019 Outlook & Review  PDF opens in a new window, QMA lays out its base-case scenario for asset class returns to generally improve over 2018, albeit with levels of volatility that remain elevated after a turbulent end to the year. The firm’s protected price gains track its expectations for very modest earnings growth, especially compared to the past two years.


But what if S&P 500 earnings don’t grow at all in 2019?

QMA also thinks there is a non-trivial risk of this happening, based on three factors: the historical relationship between security analysts’ forecasts and actual earnings, the potential for tighter profit margins due to higher wages and a stronger dollar, and the impact of slowing global GDP growth on sales.

As of early December 2018, the bottom-up forecast for U.S. earnings growth was about 8%, not bad after a nearly 25% growth rate in 2018, as companies continued to see the windfall from the December 2016 U.S. tax cuts. But over the past 37 years, annual earnings forecasts have declined by an average of 57 basis points per month over the course of each earnings cycle, as reality cuts forecasts down to size. If 2019 is an average year, in the 15 months or so from now, when we know what 2019 earnings were, the results will be .57 x 15 below what they are now, which gets us to … just about zero.1

In addition, there are plausible systemic factors that might drive the number lower. Wages in the U.S. are now growing meaningfully faster than prices (3.1% vs. 2.2%), and productivity growth, though perking up of late, has been anemic for several years, with the latest reading at 1.3%. Average profit margins (11%) are at historic highs, so companies have some room to absorb higher wages. But with unemployment at 3.7% (about 2% for college grads), wage pressure is unlikely to ease any time soon. High wages will be needed to retain talent, and even higher wages to coax new talent through the door.1

A stronger dollar could also present a challenge, potentially hurting earnings in a couple ways. S&P 500 companies get some 37% of their sales from outside the U.S. When the dollar appreciates, U.S.-made products have a price disadvantage, which can hinder sales. In addition, even if sales don’t decline, they will be worth less in dollars once translated from euros, yen, and pesos. So far in 2018, the dollar has strengthened by close to 5%, implying that earnings will be under pressure. On the other side of the P&L statement, with global GDP slowing, U.S. corporations will struggle to match 2018’s 7% sales growth. Knock that down, say, in half, and compress margins by another 3%-4% ... and it’s another way of getting close to zero.1

And what could go right?

Of course, aggressive stock buybacks could push earnings per share into positive territory by reducing net shares outstanding even if overall earnings are flat. Productivity growth could surge (we hope it will). It seems likely that economic growth will be modestly slower in 2019 than it was in 2018, but a rebound due to aggressive stimulus in China or the U.S. could keep growth more robust. So positive earnings in 2019 are possible.

But QMA wouldn’t bet the farm on it, and it isn’t—hence its current neutral weighting to U.S. equities, to go along with its neutral to underweight positioning across other risk assets, including U.S. small caps, high yield bonds, and commodities.

U.S. earnings forecasts have fallen by about 2% in the past two months.1 An aggregate reading of a new QMA quant equity signal that measures the tone of corporate conference calls suggests the enthusiasm level inside C-suites has dropped appreciably. Some big, bellwether companies have acknowledged slowing sales.

All more reasons, QMA believes, to play it conservative, at least for now.


1 Sources: QMA, Morgan Stanley, FactSet, Thomson Reuters Datastream, Federal Reserve Bank of Atlanta, Federal Reserve Bank of New York as of 12/14/2018.

The Bloomberg Barclays Aggregate Bond Index is an unmanaged index of investment-grade fixed income markets that includes government, agency, and corporate securities. The Bloomberg Barclays High Yield Index covers non-investment-grade, fixed rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. A small number of unrated bonds are included in the index. The Bloomberg Commodity Index is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week (3-month) U.S. Treasury bills. The FTSE World Government Bond Index (WGBI) measures the performance of fixed rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently includes sovereign debt from over 20 countries, denominated in a variety of currencies, and serves as a broad benchmark for the global sovereign fixed income market. The JP Morgan Emerging Markets Bond Index is an unmanaged index of emerging market debt, including USD-denominated Brady bonds, eurobonds, and traded loans issued by sovereign and quasi-sovereign entities. It limits the weights of those index countries with larger debt stocks by including only a specified portion of these countries’ eligible current face amounts of debt outstanding. The MSCI EAFE Index is designed to represent the performance of large- and mid-cap securities across 21 developed markets, including countries in Europe, Australasia, and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes, and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. The MSCI Emerging Markets Index is an equity index covering 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes, and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. The S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalization. It gives a broad look at how U.S. stock prices have performed. The S&P Global ex-U.S. REIT Index serves as a comprehensive benchmark of publicly traded equity REITs listed in both developed (excluding the U.S.) and emerging markets. The S&P U.S. REIT Index defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the United States.

The views expressed herein are those of QMA at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This commentary does not purport to provide any legal, tax, or accounting advice. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Each manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.

Certain information contained herein may constitute “forward-looking statements,” (including observations about markets and industry and regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any decisions. No representation or warranty is made as to future performance or such forward-looking statements.


1015832-00001-00 Ed. 01/2019


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