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As Wall Street braces for what may be the first U.S. profit decline since 2016, investors say the first quarter may not mark the low point for 2019 earnings.

Concerns about economic weakness in the United States and abroad and the lack of a U.S.-China trade deal are hanging over the outlook, even as the Federal Reserve’s dovish position on interest rates is expected to relieve some of the pressure on companies.

Another potential reason to worry: the spread between yields on Treasury bills and the 10-year note, a closely watched signal on the health of the economy, inverted on Friday for the first time since 2007.

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As stocks sold off in December, some investors worried that 2019 would bring a profit recession for S&P 500 companies, with at least two quarters of year-over-year declines. The last U.S. profit recession ran from July, 2015, through June, 2016.

Analysts reduced their earnings forecasts for the year as well. They now expect a 1.7-per-cent year-over-year earnings decline in the first quarter, with some profit growth in the rest of 2019, according to IBES data from Refinitiv.

With the market’s rebound this year, the Fed on pause and some expecting economic growth to improve after the first quarter, optimism seemed to be increasing that the profit outlook would stabilize after hitting a low point in the current quarter.

“It would be great if [the first quarter] represented a low point, but I’m not betting on it,” said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.

“I worry that the comparisons are going to be much more difficult as we navigate the rest of the year.”

This year’s earnings already were expected to shrink dramatically compared with 2018, when steep corporate tax cuts fuelled earnings gains of about 24 per cent.

But since the start of the year, the forecast for second-quarter profit growth has fallen to 3.0 per cent from 6.4 per cent, while estimated growth for the third quarter has dropped to 2.7 per cent from 4.9 per cent, based on Refinitiv’s data. The fourth-quarter growth estimate has come down as well, though it is still relatively strong, at 9.1 per cent, based on Refinitiv’s data.

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Those numbers could keep falling, while the first-quarter forecast is likely to improve from here. Since 1994, earnings have surprised to the upside on average by 3.2 per cent, according to Refinitiv data, which suggests first-quarter results could finish in positive territory.

Still, with investors largely discounting weaker earnings trends, the first-quarter reporting period could bring market volatility, Ameriprise Financial Inc. strategists said.

On Tuesday, FedEx Corp. cut its 2019 profit forecast for the second time in three months, causing its stock to drop and raising fresh worries about the impact of the trade conflict on earnings, with the company citing slowing global economic conditions and weaker trade growth.

Also, Nike Inc.’s shares were down more than 5 per cent on Friday after it reported North American sales that fell short of expectations.

The United States and China were scheduled to reach a deal on trade by March 1, but the White House has said it needed more time.

“You need this trade dynamic to kind of get a little bit better. There are real concerns. FedEx’s numbers are a perfect example. There’s been a global growth slowdown and companies are communicating that in terms of their guidance for the first quarter and throughout the year,” Anthony Saglimbene, Ameriprise’s global market strategist, said.

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To be sure, a lot of those fears could be reversed if there is a resolution in the U.S. trade conflict with China, and if companies’ reports are surprisingly upbeat, he said.

Strategists said they expect to hear more from companies on the trade conflict when first-quarter reporting kicks into high gear around mid-April.

“So much is dependent on what we do with the trade situation with China. The real issue will be the global economy, and in particular, trade with China,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, N.J..

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