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Dot Com Redux: BofA Warns Firms Go Dark, Stop Issuing Guidance Amid “Rampant Uncertainty”

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This week marks the official start to the 3Q19 earnings season. Major equity indexes are 1% from all-time highs, and Wall Street has never been so optimistic about the future. But in a new report from BofA, the “green shoots” economic narrative is starting to crack and could leave investors with disappointment, sort of like what happened last fall, reported The New York Times.

Savita Subramanian, head of US equity strategy at Bank of America Merrill Lynch (BofA), said in her latest research note that, companies in the last three months ended in September issued the fewest (positive or negative) guidances ahead of the 3Q earnings season. The last time investors were kept in the dark with the most infrequent guidance updates — was right before the Dot Com implosion that sent stocks plunging in fall 2000.

“Companies are starting to do what they do when there is rampant uncertainty, which just stops issuing guidance,” said Subramanian. “Companies just basically go dark.”

Subramanian said the “rampant uncertainty” of economic growth in 2020 had forced many companies to stop issuing guidance to investors in late summer, heading into fall.

A lot of the uncertainty is derived from the recent global growth cut that has forced growth estimates to the lowest levels since the Lehman crisis, as we outlined Tuesday.

The global economy is in a vicious synchronized slowdown, with about 90% of the world seeing slower growth through year-end and into 1H20.

Wall Street analysts are overenthusiastic about “green shoots” in the economy, and the possibility that this earnings season will be a huge success.

And it’s for good reason that companies have kept many investors in the dark in the last several months, executives don’t want to rain on the stock market party that has sent US equity indexes to near-record highs, based on “trade optimism” and stock buybacks, which has completely divorced investors from macro.

Analysts believe S&P500 profits could jump by at least 10% in 2020, and this overly optimistic forecast defies logic and the current global environment of a synchronized slowdown.

“It doesn’t look likely,” said Ralph Davidson, chief global equity strategist at BTG Pactual. “We expect guidance to be coming down.”

The double-digit profit growth of 2018 is over. The reason for explosive growth last year was due to a one time jolt via corporate tax cuts. And since the sugar high is over, earnings forecasts are quickly dropping.

Refinitiv estimates show 3Q19 YoY earnings could decline by 3%, which would make it the first decline since 2Q16.

The Times provides an example of late last year, when analysts thought profits would jump 10% in 2019. It turns out, those forecasts were a bit too high as it appears an earnings recession could be in the cards for 3Q19.

And the return to macro could be triggered by a dismal 3Q earnings season.

“I think we’re going to see a wave of negative guidance on next year’s earnings,” said Subramanian. “And that might not be great for the market.”

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