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Oct. 15, 2019, 4:19 p.m. EDT

With profits slipping, where should you put your money?

Earnings may be in a recession, but does that favor growth or value stocks?

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By Tim Mullaney

After surging in 2018, after-tax earnings have softened.

Earnings season begins in earnest on Tuesday, as JPMorgan Chase led the pack of banks reporting third-quarter results, and the numbers aren’t likely to be pretty. Strategists are saying profits for the Standard & Poor’s 500 /zigman2/quotes/210599714/realtime SPX +0.77%  stock index will be down about 4% — not enough to push the U.S. into a recession, but enough to keep questions alive about whether the economy will generate much growth.

So what’s going to happen, and what should small investors do about it? That’s the question up and down Wall Street this week.

First off, a quick note on Wall Street and its ways.

If history is prologue, earnings will slightly beat current expectations — the typical pattern is that estimates for a given quarter or year start out too high, get revised lower until they are a little too low right before the news hits, and then the actual news is slightly better.

A grain of salt

The corollary to this is that investors should also take projections that corporate profits will rise 10% in 2020 with a grain of salt, CFRA Research strategist Sam Stovall says.

“Analysts are usually too optimistic in year-ahead estimates,” Stovall said in an email. Since 2000, “analysts overestimate [the following year’s profit gains] by an average of 5.2%”

JPMorgan’s /zigman2/quotes/205971034/composite JPM +0.72%  results were pretty good — an 8% profit gain to $9.08 billion, or $2.68 a share, beating forecasts by 23 cents a share, that made the stock climb 2% in early trading. But nearly flat loan growth keeps prospects muted: CEO Jamie Dimon said “healthy” consumer finances are being partly offset by “weakening business sentiment and investment” — meaning that he sees the same economy everyone else does.

The outlook is the same as it has been — growth is slowing, but a recession isn’t in view yet, notwithstanding some outlier pundits who think the recent manufacturing slowdown has too much momentum not to spill over into the broader economy.

Mark Hulbert: This transportation indicator is far more upbeat than the Dow Transports

We’ve all been though the speculation that an “earnings recession” — two straight quarters of year-over-year earnings declines — will lead to a real recession, but so far earnings have stayed barely above 2018 and forecasts call for them to move back into positive territory by the fourth quarter.

Also read: Eroding profit margins will push U.S. into recession in 2020, leading forecaster says

What that means is the subject of a disagreement this week between Goldman Sachs   and Morgan Stanley, two of Wall Street’s biggest and most respected investment banks.

Goldman pushes growth

Goldman argues that the slow-but-fairly-steady growth of the economy means that investors should be focused on growth stocks, in information technology and elsewhere.

/zigman2/quotes/210599714/realtime
US : S&P US
3,120.46
+23.83 +0.77%
Volume: 1.87B
Nov. 15, 2019 5:04p
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/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 129.53
+0.93 +0.72%
Volume: 10.16M
Nov. 15, 2019 6:30p
P/E Ratio
12.78
Dividend Yield
2.78%
Market Cap
$402.98 billion
Rev. per Employee
$497,647
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