November: up 21.3 percent
January: up 5.6 percent
But how much should be cut?
Investors fall into one of two camps: Those who believe earnings growth could be flattish in 2019, and those who think earnings will grow in the mid-single digits.
The difference is not trivial, according to Raich: “If earnings were to go to 4 or 5 percent for 2019, that’s a good thing and the markets will reset higher. If it goes to zero, that’s not good.”
For Raich, the drop in stock prices in the fourth quarter was simply a response to the deteriorating macro environment. “More companies are lowering estimates and by a greater amount. The good news is that the markets are pricing this in,” he said.
It certainly seems that way. Look at the very mild response to Samsung’s very poor guidance. Had that announcement happened in October, shares of Samsung and semiconductors would have been down far more.
But with prices down, valuations look a lot more attractive. That’s the message from the Wharton School’s Jeremy Siegel, noting that the S&P 500 is now trading at a roughly 16 multiple to 2019 earnings: “Now, that’s not a very high multiple,” he said on CNBC on Tuesday. “So, even if there’s no earnings growth, you’re not paying up prices for stocks, you’re not valuing the market at anything that’s a crazy valuation.”
For Raich, the key to getting positive earnings growth lies first with the Federal Reserve’s actions on interest rates. “The Fed needs to back off, otherwise growth estimates will go to zero,” he said.
The second issue for earnings is trade. “The trade conflict is creating an overhang on CEO confidence,” Raich said. “It’s more of the psychology of what an overhang does to capital spending plans.”