Amid uncertainty around the global economy and company profits, our head of markets talks us through expectations ahead of the US second-quarter results season.
"No varnish can hide the grain of the wood; and that the more varnish you put on, the more the grain will express itself." Great Expectations by Charles Dickens.
The US second-quarter earnings season gets into full swing next week, and there is a largely unreported conundrum.
On the one hand, markets are touching all-time highs. In the year to date, the Dow Jones Industrial Average is up over 15%, the S&P 500 has added over 19%, and the technology index that is Nasdaq has raced 23% ahead.
And yet the US is in what is known as an 'earnings recession' – that is, two consecutive quarters of falling growth – and this is likely to become three. Over the last few weeks, some 77% of US companies have been cutting guidance for the forthcoming season.
Any rising market needs to climb a wall of worry, and there is no shortage at present.
There is the ongoing uncertainty around the real effect of the trade spat between the US and China, heightened stock valuations given the recent surge, and geopolitical concerns around Iran.
The Trump effect
President Trump's penchant for tariffs, given his perceived unfairness on the US historically, has increased the possibility of waning global growth. We can probably expect more posturing as the President will be extremely keen for markets to remain stable (or rising) as he seeks a second term at presidential elections in November next year.
However, this could also be having an effect on his own turf in terms of business confidence and investment spending.
Recent economic numbers within the States have been mixed. Manufacturing data, for example, has deteriorated significantly of late, with June's reading coming in at the lowest since 2009, although still (just) expanding.
Share buyback programmes may also be muddying the waters when trying to understand true company health. By some estimates, in the year leading up to March 2019, there were buybacks in the US which totalled over $820 billion on $1.1 trillion of earnings.
Last week, arguably the most closely watched economic release of all, the non-farm payrolls data (employment figures) showed that 224,000 jobs had been added in June, as compared to the 160,000 the market was expecting, with unemployment still around half-century lows at 3.7%.
And yet the market believes that the probability of an interest rate cut coming out of the Federal Reserve meeting on 30th/31st July is 100%.
How can this be?
Perhaps a Fed rate cut could be seen as an insurance move, before the economy loses some momentum and providing some further stimulus.
After all, markets are designed to factor in future events, prospects and company health. There have been some indications that perhaps the US economy is beginning to stutter.
Apart from the previously reported difficulties which tech-giant Apple has been facing in China, the auto industry has been making some uncomfortable observations. A couple of weeks ago, General Motors (NYSE:GM) reported that vehicle sales in China had fallen 12% in June, while Ford Motor Company (NYSE:F) reported a dip of 22%. For the first quarter of the year, GM's sales fell 17% and Ford's 36%.
The quarterly reporting season is always important, but with so many contrary indicators, this one is particularly fascinating.
The companies themselves need to beat expectations to maintain investor confidence. Of particular interest will be the sectors which are tariff sensitive (and separately, also vulnerable to added regulation), such as the auto sector as mentioned above, healthcare and of course technology.
Add in the banks, for whom low interest rates are not a friend, and the next few weeks could be anything but the gentle summer lull which some were expecting.
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