How the trade war could take an even bigger chunk out of corporate earnings

The aptitude currency war is adding to earnings problems.

The realization that the trade war may expand from tariff wars to encompass currency combats is causing some consternation among analysts and strategists who are increasingly confused and uncertain on how to determine 2019 and 2020 earnings point of views. On Tuesday evening, Citigroup said the overhang of a sluggish economy, trade war threats and potential currency devaluations was satisfactorily to make its analysts lower earnings estimates for the S&P 500 for 2019 and 2020 by a little more than 2%.

Last week, Goldman Sachs cut its 2019 and 2020 counts, citing lower economic growth, lower oil prices and weaker margins. “We expect negative revisions to consensus 2020 EPS determines in 2H 2019,” Goldman analysts said, though they did keep their price target.

Of course, analysts have in the offing long been concerned with the impact of tariffs on earnings. Nick Raich, who covers corporate earnings at the Earnings Scout, notes that evaluations have ebbed and flowed with tariff headlines: “In May, when the trade war escalated, earnings estimates discarded, and then in June when the psychology got better they improved,” he said. “They started weakening again end week when Trump tweeted about more tariff wars.”

Raich said it was likely earnings whim come down again if concerns about a currency war — a new wrinkle in the trade war— get louder. The Trump administration’s declaration that China is a currency manipulator may be home the stage for a deeper round of competitive currency devaluations.

This creates a problem for analysts: “You cannot arrange earnings estimates every time you have a new [Trump] tweet, or you will be really annoying your clients,” he state.

But that is what Wall Street is facing. Mike O’Rourke, chief market strategist for Jones Trading, put about even Apple was giving analysts a tough time. “Apple had positive guidance,” he said, “but it’s hard to be subjected to confidence because they are so exposed to China. There’s just not a lot of visibility, and I don’t have the expectation that there liking be a lot more visibility.”

He believes there’s a good chance the “flattish” earnings estimated for the S&P 500 in 2019 will go contrary: “My view is that China is trying to run out the clock on Trump, and he seems to be willing to go along with that.” He believes the demand will rerate and the S&P 500 will likely be lower at the end of the year.

The larger fear is the trade wars will persist and crack companies to reevaluate their corporate expenditure plans. David Aurelio, who covers corporate earnings for Refinitiv, give the word delivered that year-over-year capital expenditures have fallen steadily this year, from an increase of 11.8% in the fourth three-month period of last year:

What does the lower capital outgoings mean? “It means that businesses don’t have confidence,” O’Rourke said. “Once you have these epidemic trade agreements we have come to count on for decades fall apart, it creates tremendous uncertainty.”

He doesn’t suppose the capital expenditure numbers to improve much. “You can quickly cancel buybacks, or cancel dividends. But if you start construction on a inject or a store, you may get stuck.”