Global Woes and Earnings - March 18, 2019

The U.S. economy was firing on all cylinders for much of 2018. The global economy started 2018 on an upbeat note but growth quickly began to moderate. This year, U.S economic growth has begun to moderate, and the global economy has downshifted into a low gear.

In part, it’s one reason Fed Chief Jerome Powell recently said he’s been seeing “some crosscurrents and conflicting signals.” It’s a big reason why the Fed is no hurry to raise interest rates right now.

We not only see it in the economic data, but also in the Q1 earnings outlook. Look at the graphic below. It is the forecast for first quarter profits for S&P 5003 companies broken into three categories.

Analysts are forecasting that S&P 500 companies with more than half their sales in the U.S. are expected to eke out a 1.0% increase in earnings versus a year ago (as of March 8). S&P 500 companies with more than half their sales outside the U.S. are projected to see a decline in earnings of 11.2%.

The recent strength in the dollar is working against firms that secure a larger percentage of sales overseas. You see, a stronger dollar means they must translate sales made in foreign countries back into a more expensive dollar.

But weakness can primarily be attributed to slow growth in Europe and a slowdown in China.

Yet, weakness in Q1 profits has yet to take a big bite out of 2019’s rally. For starters, the Fed is on hold and Treasury bond yields have come down – lower yields present less competition for stocks. Second, the U.S. economy continues to expand.

In the unlikely event growth stall out in the near term, we’d see a stiffer headwind for stocks.

New fuel

What’s needed to push shares higher? Greater clarity on the international outlook, coupled with continued growth at home, would likely be viewed in a positive light.

Notably, revenue projections are positive in Q1 – 6.5% for companies that conduct over half of their business at home and 0.7% for companies that conduct over half of their sales overseas (FactSet, 3/8/219).

It signals that the projected decline in Q1 profits is occurring amid pressure on margins, i.e., rising expenses. It also suggests the U.S. economy continues to expand.