World equity markets took a sharp turn downwards after Daimler-Benz reported fourth-quarter earnings before interest and taxes that undershot the lowest analyst estimates. The automaker said that it would show little growth in profits during 2018, disappointing positive analysts’ forecasts. Heavy spending on new technologies would eat into the bottom line, although Daimler said it expected modest growth in revenues.
The plunge in Daimler-Benz shares brought the overall DAX Index down with it, and the dominoes began to fall. Daimler is down 3.2% as of 9:00 am, and the DAX is down by 1.4%, leading an overall decline in the broad European index of 0.88%. The plunge in the DAX led a decline in S&P futures.
The Daimler announcement wasn’t the only piece of unappetizing news that the market had to digest this morning. Alibaba shares fell sharply despite a sharp increase in earnings after the Chinese e-commerce giant announced that it would take a 33% stake in Ant Financial.
But the Daimler news spooked a market which has already built rosy profit forecasts into present prices. Stocks are trading off forward (that is, forecasted earnings) rather than trailing earnings. If a blue-chip like Daimler disappoints, investors worry about the viability of analysts’ forecasts in general. That’s why Daimler took down the DAX, the DAX took down Europe, and Europe took down S&P futures.