Trump has a lot riding on corporate earnings season
Corporate earnings season has begun – the roughly four-week time period when the majority of corporations release their financial results for the prior quarter. For most companies, this will be the April-June second quarter. Each company’s profits, sales and revenues, among other data, will be dissected by the markets to justify the current price of the company’s stock.
For President Trump, this will be the most important earnings season thus far in his presidency. You see, in his escalating trade disputes with China, Canada, Mexico and the European Union, his greatest leverage is the current strength of the U.S. economy. While the economies of these other nations are receding, a growing U.S. economy helps absorb the punishment and negative impact of these trade disputes.
With a robust U.S. economy, President Trump can maintain his highly aggressive strategies, and often heated rhetoric, that has become the hallmark of his trade negotiations. He is well aware the leaders of these other nations are hesitant to risk further destabilizing their weakening economies.
The second quarter results will be closely watched. It is the first full quarter where concerns of rising inflation, interest rate hikes and trade disputes have weighed on corporations. The markets will be carefully analyzing the extent to which these concerns are starting to impact corporate profitability and economic growth.
Corporate America had a very strong first quarter earnings season and there are high expectations for the second quarter. In the first quarter, corporate earnings increased by a stellar 26 percent from the prior year. For the second quarter, analysts are expecting a growth rate of 21 percent. For perspective, in 2016, the average year-over-year growth rate for corporate earnings was just 1.3 percent. In 2017, the rate was 12.7 percent.
High expectations are being driven, in part, by the continuing surge in retail sales. Consumer spending is the key driver of the U.S. economy and accounts for two-thirds of all economic activity. In June, retail sales increased by 0.5 percent – the fifth consecutive month of growth and the longest streak since 2015. For the 12-month period ending in June, retail sales increased by 6.6 percent, the largest annual growth rate since February 2012.
Another strong quarter of corporate earnings will provide some assurance the U.S. economy is absorbing the moderate amount of inflation, interest rate hikes and trade tariffs we currently have. However, if we have a disappointing earnings season, the markets will have to re-evaluate the impact of these concerns on U.S. corporations.
President Trump would also have to re-evaluate his aggressive tactics in the ongoing trade disputes. His heated rhetoric the past few months has admittedly ruffled some feathers amongst U.S. trading partners. For now, his biggest negotiating tool is the strength of the U.S. economy. But if corporate earnings suddenly head south, so does much of his leverage – something America’s trading partners will be all too willing to quickly point out.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
