There is an interesting phenomenon occurring right now: the United States economy doesn’t seem to be growing despite an impressive corporate earnings season. If this seems backwards to you, you are not alone. Many investors are struggling to understand how corporate America can be doing so well from an earnings standpoint while our nation reports poor GDP numbers. Today, we’ll explore this seemingly strange event.
Current Market Conditions
The first factor to take a closer look at is the market. It is becoming clear that S&P 500 companies conducting business overseas are posting amazing quarterly earnings.
Investors are asking, “is this the year of international investing?” So far this earnings season, it appears the less exposure a company has to the US market, the better their reported revenue is. This is why we have the gap between the earnings data and US economic growth.
A recent CNBC analysis found earnings per share growth and GDP expansion in first quarter widest margin seen since the third quarter of 2011.
As I have mentioned on the Jon Sanchez Show in the past, a huge percentage of S&P 500 overall sales come from foreign markets. Although the US is still a large economy, growth has stagnated in comparison to other nations.
US Interest Rates
The second factor to analyze is US interest rates. Our Fed is raising interest rates while the rest of the world is moving in the opposite direction, sometimes lowering interest rates into negative territory. While this is great for America’s bank trade revenue, this could be one of the reasons the US economy is stagnating.
On that note, the International Monetary Fund raised annual growth forecasts for China and the Eurozone by .10% from the January 2017 report. They also raised their estimate for Japan and the United Kingdom despite UK’s Brexit dilemma. In comparison, their estimate for the US economy was unchanged. This time last year, IMF had to cut the global growth forecast due to a plunge in oil prices across the board.
The third factor to consider is US currency value. The dollar traded lower this year, which cut into overseas profits. This is due to currency conversion rates. When companies generate revenue overseas and attempt to bring money back home, they must convert it back to US dollars.
The fourth and final contributing factor in the corporate earnings phenomenon is last year’s earnings. A year ago, corporate earnings looked very bad. Last year companies in the S&P 500 reported four straight quarters of earnings decline. By comparison, this year’s numbers are looking especially good.
The Bottom Line: what investors need to do going forward is consider adding different elements to our portfolios to reflect changes in the economy. Before adding or removing any items to an investment portfolio, I absolutely recommend consulting with a licensed financial advisor who can analyze your personal risk tolerance, retirement horizon, and other personal goals as they relate to investment options. You can read more about the investment planning services Sanchez Wealth Management, LLC offers here: https://sanchezwealthmanagement.com/services/. If you are considering international investments in any form, I also recommend you read my latest blog post for the pros and cons of international investing.
Jon Sanchez is a registered representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. OSJ Branch: 12671 High Bluff Drive Suite 200 San Diego, CA 92130. Sanchez Wealth Management, LLC and IFG are not affiliated entities. CA Insurance Lic. #0772626.