Wall Street will likely see worst earnings season in about three years, Nick Colas warns

It may be an earnings season to forget.

DataTrek Research’s Nicholas Colas believes the upcoming round of quarterly numbers will be the most contentious in about three years, and he’s worried they could spark the next stock market downturn.

“Right now expectations are for a negative 3.9% comp from last year. That’s the worst comp and the first negative comp since 2Q of ’16,” the firm’s co-founder said Friday on CNBC’s “Trading Nation.”

Colas’ comments come a week before first quarter earnings season gets underway. J.P. Morgan Chase kicks off on Friday, April 12 before the market open.

“Analysts have been taking their numbers down dramatically over the course of the quarter. We started the quarter basically thinking up 3% now we’re looking more like down 4%,” he added. “That’s the biggest decline since the first quarter three years ago.”

Even though analysts have been taking down their earnings forecasts, Colas doesn’t think most investors are prepared for disappointing numbers.

“This market has really been dominated by a rate narrative. Interest rates have come down materially over the course of the year. And, that has buffered stocks against some worries about earnings,” said Colas. “But once you have to face the actual earnings results, I think the story is going to change.”

And, Colas suggests downbeat revenues will add fuel to the weak numbers.

“Even if companies beat materially though, the big issue here: Revenue growth is still supposed to be 5%. So margin pressure is going to be the story for this quarter,” Colas noted.

Despite his near-term cautious view, Colas sees a few sectors bucking the first quarter negative earnings trend.

“Only four sectors are expected to show earnings growth. And, they’re all defensive groups that have been working recently,” Colas said. “Utilities is one, and real estate is the other. Health care is challenged, but should show earnings growth. And industrials, for all of the drama around trade, should basically be flat. Everything else is going to be negative.”