Another Earnings Win – May 28, 2019

Q1 earnings season is wrapping up, and most S&P 500 companies managed to top a very low hurdle. With all but 4% of S&P 500 companies having reported, profits are up 1.5% versus a year ago (Refinitiv).

It hardly sounds impressive, but analysts had been expecting profits to decline by 2.5% as reporting was just getting underway (Refinitiv).

Clearly, analysts were too conservative. A four-percentage-point beat is encouraging.

Let’s break out earnings between companies that conduct more than half of their business at home and compare to those that conduct more than half of their business overseas.

What we see is a stark difference, with profits rising 6.2% for companies that are domestically focused vs a 12.8% decline for firms that are internationally focused.

Multinationals struggled against the backdrop of a weak global economy and the uptick in the dollar, which makes it more expensive to translate overseas sales back into the dollar.

Trade war woes

At this juncture, the trade war with China may further exacerbate weakness in the international economy and could slow growth at home.

About 4% of S&P 500 revenues originates from China (S&P Global) – it’s not much; however, some bigger names depend on China for a larger percentage of sales.

With a harsher tone coming from both sides last week, negotiations could drag on for months.

The U.S. economy is plodding along, and the stock market has held up reasonably well, which gives the U.S. leverage. Yet, China won’t sign a deal that appears to be a total capitulation to U.S. demands, even if China has been gaming the global system.

Plus, China’s economy is strong enough today that it may risk new barriers at the expense of no deal.

For investors, the S&P 500 Index is down a modest 4.1% (MarketWatch) since peaking April 30 (St. Louis Fed Reserve). But additional volatility can’t be ruled out as investors attempt to price in the “new normal.”

Created 2019-05-28 14:51:16