BMO Family Office
"Millions saw the apple fall, but
Newton was the one who asked why"
- Bernard Baruch
Earnings Expectations and Holiday Spending
As detailed in our recent publication (Q3 Earnings review: Jumping over the low bar) the third quarter earnings reports by S&P 500 companies have, in aggregate, shown slightly negative growth. Nonetheless, the equity market took comfort that most companies were able to surpass their forecast levels of earnings, which would have implied an even greater decline. Looking ahead to 2020, equity market progress is likely to hinge on whether earnings growth can re-accelerate rather than being just "less bad." Current analyst estimates for 2020 S&P 500 earnings growth clock in at over 10%. As we move through next year, we can expect a reduction of a few percentage points in this growth estimate, which is typical, and the equity market should be able to take it in stride. Greater deceleration in earnings growth to the low-single digit range would be a headwind to equities should that occur.
It is possible that upcoming holiday retail sales growth will alleviate slowdown fears and give a boost of confidence to consumers and businesses. The National Retail Federation expects holiday sales to show 3.8% to 4.2% growth compared with last year’s holiday season. Our BMO model of holiday sales growth, which accounts for spending trends earlier in the year along with economic and market variables, points to a higher estimate of 4.7% (see figure 1). This growth estimate would be even higher, but the shortened number of days between Thanksgiving and Christmas this year moderates the expectations. While our base case is for strong holiday sales, the extent to which news flow and concerns surrounding slowing growth, the U.S.-China trade war, campaign narratives, and impeachment hearings will impact holiday spending remains unclear.
As of early November, aggregate polling continued to point to Joe Biden leading the field of democratic candidates
(see figure 2). In many cases, however, Elizabeth Warren fell within the margin of error for these polls. It also remains to be seen how much the entrance of former New York City mayor, Michael Bloomberg, and former Massachusetts governor, Deval Patrick, will affect the race. Their moderate positioning points toward Biden’s support being most at risk. While February of next year will have four democratic primaries and caucuses starting with Iowa, the kaleidoscope of democratic voter preference will come into focus more sharply on Super Tuesday (March 3) when 15 states go to the primary polls.
As for looking ahead to the presidential election in November, there is a lot that can happen between now and then with the economy and politically. At present, suffice it to say that even though President Trump’s "net approval ratings" – those who approve minus those who disapprove – are the second lowest of the past seven presidents (see figure 3), it is difficult to draw conclusions from this statistic. For example, at this stage in his presidency, President (George H.W.) Bush (41) had the highest net approval rating among the recent presidents, yet did not win re-election. The phrase, "it’s the economy, stupid" remains a lasting soundbite from his re-election bid against President Clinton. In a similar misalignment, President Obama had much lower net approval ratings than President (George W.) Bush (43) at this stage in their presidencies, yet President Obama won the Electoral College re-election much more decisively than did President Bush. Clearly, many variables are in play, including how well candidates match up against one another – particularly in the small number of battleground states. In sum, it’s early, but as we move through 2020, election considerations may become increasingly important.
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