The three-week market rally may have run into trouble. The S&P futures are down more than 20 points on Sunday evening thanks to Goldman Sachs. The bank released a note this weekend saying S&P earnings for 2019 may only rise 3% because of multiple factors. The futures markets opened lower and continued to move lower.

Goldman said economic growth was slowing and earnings growth in 2019 could be "quite disappointing." They advised clients to steer clear of companies leveraged to strong economic growth. They cited earnings warnings from several major consumer brands as evidence consumer spending was fading and economic growth may have peaked.

With Q4 earnings expected to grow 22% and Q1 earnings now estimated at 6% and fading, company guidance is more than likely going to fade as well. First, the comps from Q1-2018 are going to be a high bar and given the uncertainty over 2019 companies will want to under promise and over deliver rather than maintain strong guidance and then be forced to warn later. This will setup a negative bias to the Q4 earnings cycle even if companies continue to post strong results.

The current economy was lifted by the tax cuts and that stimulus has run its course. Strong employment has continued to boost sentiment but recent weakness in the regional Fed reports suggest companies are starting to slow their aggressive behavior. Capital spending has slowed, inventory buildup is slowing and worries over the China trade war are a cloud over any business that imports goods or parts from China. The strong dollar is also a stiff headwind despite a minor decline over the last month.

Goldman's baseline scenario is still 6% earnings growth but that depends on GDP growth and global growth at a level above that projected by Goldman's own economists. They have cut their GDP estimates to 2.4% growth for the US and 3.5% globally.

They also blamed low oil prices and the impact to energy earnings. At $50 companies are breaking even and some are losing money. Oil prices need to be $65 or higher to produce decent earnings growth for energy companies because of the rising cost of materials and services along with debt service and rising wages.

Late Sunday evening China reported their trade surplus for 2018 at $351.76 billion and the lowest since 2013. Exports rose 9.9% while imports rose 15.8%. This is a positive for the US because it means the trade war is working and China will want to reach a deal sooner rather than later. Futures began to improve briefly after the news broke at 9:PM ET.

The calendar for next week has a couple of important events. The next vote on the Brexit plan will be on Tuesday and many analysts do not believe it will pass. With the hard exit date in March, they need to get a plan approved ASAP so everyone can begin preparations. A failure of the vote could put May back in hot water and eventually there could be a new election to decide her fate.

The Fed Beige Book on Wednesday outlines the economic conditions in each of the Fed regions. With several recent economic reports showing weakness this could tell us where that weakness is appearing. It is not normally a market mover unless there is an unexpected change in the outlook.

The Producer Price Index will give us the inflation rate at the producer level, and it is also expected to be benign.

Retail sales on Wednesday could be a surprise after multiple retailers lowered guidance after the Q4 holiday season. Since the weekly Redbook sales from Chain stores has been averaging about 9% growth, I would not expect the monthly overall report to be a disaster. We could see weakness, but sales should be rising.

The Housing Market Index could be a surprise after a persistent decline in the other home sales indicators.

The Philly Fed Manufacturing Survey will be on Thursday. In the last report the headline number declined from 11.9 to 9.1 and the lowest level since 2016. This weakness seems to be a trend in the various regional reports.

The coming week is the start of the Q4 earnings cycle and nearly every major bank is reporting along with several Dow components. JPM, Goldman and American Express should be the most watched financials but Citigroup, Bank America, Wells Fargo, US Bank, Blackrock and Morgan Stanley also report.

The biggest market mover will be Netflix on Thursday after the close. The stock is up $106 since the December 26th low at $231.

With 20 S&P 500 companies already reported the blended earnings growth is only 14.5% and revenue growth of 5.6%. This is significantly under the forecast for 22% and represents several disappointing reports. However, 20 companies are just a small fraction of the total to report so that earnings number is going to change significantly as the weeks progress.

Even at 14.5% it is more than double the consensus of 6.8% growth for Q1. The S&P 500 is currently trading at a PE of 15.1 and the Russell 2000 at 19.5.

Total S&P earnings for 2018 are expected to be around $161.68. For 2019 that rises to a record $172.04 and 2020 is expected to hit $191.32.

The markets have now risen for three consecutive weeks. The Dow has gained 1,449 points over that period and is only about 200 points away from recovering the 1,655 points it lost in the week before Christmas.

It has been a good three weeks with only one day with a material loss thanks to Apple. The S&P has closed just under 2,600 for three consecutive days and the intraday dips on each day were quickly bought and the index returned to that resistance.

On Friday the big cap averages failed to close with a gain but they were only minimally lower. I attribute that to normal weekend event risk and the political battle underway in Washington. While that does not directly impact the stock market it probably weighed on investor sentiment and they saw no reason to continue buying the highs until resistance has been broken.

As of Friday's close I expected to see a resistance breakout attempt on Monday. That may not happen now after the Goldman note. Should the S&P move over 2,600 the next material resistance is 2,632 and that could prove tougher to break.

With a sudden flurry of earnings warnings, we could see investors slack off on their buying until we get some of the actual earnings behind us. If the trend in warnings continues and earnings growth remains in the 14% range, we had last week, that could trigger some more caution. We need some big reports with big earnings and even stronger guidance to move the markets through that 2632-2800 congestive resistance range on the S&P. There are multiple resistance levels in that range at 2,700 and 2,740.

To say the Dow components were lackluster on Friday would be an understatement. Advancers and decliners were dead even and only three stocks moved over $1. UnitedHealth added 19 Dow points and Apple and 3M subtracted 19 Dow points leaving the index flat.

The Dow is struggling with round number resistance at 24,000 and stalled there on each of the last three days. The next major resistance should be around 24,300 then 24,750. Once into the congestion range of 24300-26000 we could see several weeks of choppy trading unless sentiment changes significantly.

The Nasdaq has the worst resistance path of the big cap indexes. Round number resistance begins at 7,000 and again at 7,300, 7,400 and 7,500. Congestive resistance starts at 7,000 to 7,500. This is where the Nasdaq was extremely volatile from late October until early December. Many investors that took positions in this volatility have been underwater for the last month. They will be happy to exit for a breakeven.

The Russell 2000 has had a great rebound. It has posted gains on 12 of the last 13 sessions. The amount of the gains has slowed, and the index was barely positive on Friday. The declining risk of Fed rate hikes is the reason for the rally. However, the index is headed into some serious congestive resistance and until it closes over 1,600 again, there is going to be a daily fight for higher ground.

I expected the market to be positive next week but the Goldman note has caused clouds to form. The earnings excitement has been blunted by the earnings warnings and especially by Goldman. Fortunately, fund managers still have excess cash and buybacks are still in progress. There were $1.1 trillion in announced buybacks in 2018 and we should see another wave with the Q4 earnings because stock prices are cheap. I would try to buy your favorite stocks on dips. Once we move a little higher in to the Oct/Nov congestion ranges we should see a little more volatility in individual stocks.

We saw several opening dumps last week and each one saw the dip bought. While I would love to see that on Monday as well, I am far less expectant. I do not believe the market is going to roll over and die unless this week's earnings turn decidedly negative. Positive reports could negate the Goldman note to clients.

Enter passively and exit aggressively!

Jim Brown

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