DataTrek Research is out with a chart suggesting stocks will struggle this month — pouring cold water on the likelihood of a “Santa Claus” rally that traditionally boosts stocks in December.
According to the firm’s co-founder Nicholas Colas, it comes down to a breakdown in earnings trends and investor sentiment. He said the earnings picture is dramatically souring due to risks stemming from China tariff costs to accelerating wage growth.
“They filter through to fundamentals,” he said Friday on CNBC’s “Trading Nation.” “The minute the global economy started to roll over, earnings revisions began to roll over, and that’s the period were in now.”
Colas mapped out his thesis in a chart showing earnings revisions’ impact on stocks.
In the beginning of the year, estimates pointed to a strong fourth quarter, and the S&P 500 Index rallied 9.4 percent from January 1 to October 1.
However, just as the correction was getting underway in October, a change happened. Earnings revisions dipped into negative territory, and the S&P fell 5.7 percent.
During the first three quarters of 2018, “we had 20-25 percent earnings growth,” he said. The current quarter “is going to be more like 13 to 14 percent, and next year is going to be more like 5 to 6 percent even though analysts still expect 8 to 9 percent,” Colas said.
“The worry that we have is you’re going to see continued earnings revisions to the downside not just for Q4, but for 2019 as a whole,” the analyst added.
It’s an ominous sign during a season known to be strong for stocks, according to Colas. Yet, he suggests, it’s not just any year.
“That gives the market some pause about valuation and future earnings growth, and creates the volatility that we’ve seen and should continue to see,” Colas said. “We do have deteriorating fundamentals.”