Data to be released in the coming days and weeks will show corporate earnings and economic activity in the United States likely peaked in the most recent quarter, analysts warn.
The US September quarterly profit reporting season has started well, with 87 per cent of results exceeding profit expectations and close to two-thirds beating on revenue, according to AMP Capital.
While still early in the season – only 85 of the top 500 listed businesses have reported – profits look like they will yet again beat market expectations to grow at 24 per cent year-on-year. A further 160 S&P 500 firms release quarterly profit updates this week, according to Bloomberg.
The better-than-expected start to the US earnings season, including a number of strong profit figures from the likes of Procter & Gamble and Netflix, helped steady Wall Street last week, when the benchmark S&P 500 sharemarket index drifted 0.2 per cent lower after the previous week’s near 5 per cent plunge.
Support from buoyant profit results “can persist for another two to three weeks”, JP Morgan head of cross-asset strategy John Normand said.
“The medium-term message, however, is that markets are witnessing peak EPS [earnings per share] growth, which is sometimes associated with major cross-asset rotations” out of corporate credit and shares and into bonds, Mr Normand said.
“Our base case is that of a sharp earnings slowdown after the current quarter since most of the drivers this year were one-time in nature,” Barclays US equity strategists agreed.
“The corporate tax cut was a one-time effect in terms of growth, and our economists expect the ‘sugar high’ from fiscal stimulus to fade over time.”
The Barclays analysts expect earnings growth for the aggregate S&P 500 index to more than halve from current levels to below 10 per cent during the first half of 2019.
“This does not include the effect of tariffs on the US-China trade which could further pressure earnings,” the Barclays strategists write. Their analysis suggests higher tariffs could shave 3 percentage points off earnings.
President Donald Trump’s aggressive tariff policy on Chinese imports has so far been largely costless to the US economy, with data on Friday evening expected to show that the American economy grew at an annualised pace of 3.4 per cent over the September quarter, against the previous reading of 4.2 per cent.
But evidence of a sharp fall in trade volumes among the $US34 billion of goods already subjected to higher imposts suggests the impact of the announced tariffs on an additional $US216 billion of Chinese goods will be substantial, UBS economists say.
“Will the US GDP slow sharply because of tariffs? We believe so,” they write.
“While the average firm in the US can likely withstand a rise in costs, new, vulnerable firms will not. Many newly established manufacturing plants may close permanently, while other plants that would have expanded may pull back from hiring and investment.”
The UBS economists expect tariffs will subtract 1 percentage point from the level of GDP and reduce employment by 351,000.
The US Federal Reserve’s commitment to tightening policy has pushed bond yields firmly higher, and a recent spike in Treasury yields sparked the recent market turmoil as investors fret that less accommodative monetary policy heralds the imminent end of the economic cycle.
“We think markets are right to be alarmed” about climbing borrowing costs, Capital Economics chief US economist Paul Ashworth said. Real, or after inflation, two-year Treasury yields have climbed 2 percentage points over the past few years, “matching the increases ahead of each of the past three recessions,” Mr Ashworth said.
“There are already signs that rising borrowing costs are weighing on rate-sensitive sectors of the economy, in particular the housing market. With the boost from fiscal stimulus set to fade, this is a key reason why we expect economic growth to slow sharply next year, prompting the Fed to stop raising interest rates sooner than most anticipate.”