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The U.S. stock market has struggled recently, with the Dow on track for its fifth straight daily decline despite one of the best earnings seasons on record.
Why? According to one analyst, the blame may fall on one corporate executive.
On April 24, Caterpillar Inc. reported its quarterly results. While the heavy machinery maker reported first-quarter sales and earnings that came in above expectations, the company’s chief financial officer sounded a cautious note that sent shares sharply lower.
“While we expect strong operating margins for the rest of the year, which is defined as within or better than the Investor Day ranges, we don’t expect to repeat first-quarter operating margin at the consolidated level,” Bradley Halverson said on the company’s earnings call. The first quarter was described as likely being the “high watermark” for the year.
The stock has tumbled since then, having lost 6.6% since its close before the earnings. Broader markets have followed it lower, with the Dow Jones Industrial Average down 2.1% since then and the S&P 500 losing 1.5%. The Nasdaq Composite Index has dropped 0.6%.
Halverson’s comments “sounded a warning signal that crushed all hopes of first-quarter earnings season being the impetus that would finally drive the market higher,” said Lindsey Bell, an investment strategist at CFRA. “His comments on adjusted profit per share in [the first quarter] being the high-water mark for the year were immediately applied to the entire market.”
Other analysts have joined Halverson in expecting the first quarter to be as good as things are going to get for a while. The Wells Fargo Investment Institute recently suggested that earnings growth may have peaked in the first quarter, while Morgan Stanley calculated that expectations for stock returns were at their lowest level since before the financial crisis.
First-quarter earnings have been strong, by and large. According to Bell’s data, 77% of the S&P 500 companies that have reported thus far have topped consensus analyst forecasts, while 73% have beaten expectations for revenue. Both are significantly higher than the historic average of 67% for earnings and 55% for revenue.
“The reaction to these impressive reports hasn’t been what was anticipated. Stocks either traded down immediately on the mention of plans to increase spending (also known as investment), affirmation (and not an increase) of guidance, or the mere notion of cost increases (even if price increases were planned to offset those costs),” she wrote. “Investors looked for any and all reasons to sell the results.”
Bell argued that uncertainty surrounding trade policy, North Korea, and other geopolitical issues was one of the factors holding back Wall Street bulls. She also noted that there was heavy political uncertainty going into the coming midterm elections, and suggested that stocks may remain stuck in their trading range until after the midterms pass.