Boom time
American company earnings grew 20% in the second quarter, relative to a year ago, and profit margins are at record levels.
It’s early days for the S&P 500 reporting period (just less than a fifth have released numbers), but earnings are looking good, according to FactSet. Many of the companies have highlighted rising costs, but tax cuts have easily outweighed them. The average net profit margin for the blue chip US index is 11.6% – in line with the previous quarter. That’s the highest level since the data was tracked in the third quarter of 2008. Three sectors with particularly strong profit margins relative to their histories are industrials, telcos and raw materials.
These knock-out numbers may come down somewhat as more companies report. They are artificially higher, too, driven heavily by tax-cuts. Obviously the money and the benefit aren’t artificial – regardless of where it came from, it means more money for shareholders. But we mean it can make it harder to judge shares prices. For instance, analysts canvassed by FactSet expect profit margins to go even higher as 2018 progresses. And yet, a lot more companies have warned that future earnings will be lower in the coming quarters. The tax effects are flowing through companies’ numbers like a baby hippo in a snake’s stomach.
This could cause a few wobbles in markets as investors determine how much the underlying business is really worth after one-off benefits and future risks are taken into account. And that’s before you allow for the metaphorical grenades that President Donald Trump lobs into conversations about global trade. To say Europe is angry with Mr Trump would be an understatement. The French finance minister insisted that the bloc would not negotiate “with a gun to the head”, and it was the US that would have to de-escalate the tension.
That’s not really Mr Trump’s style, so it seems likely this impasse will remain for some time. And these are discussion between allies! The bad blood between the US and China is probably the worst it’s ever been. There’s a Mexican stand-off between the globe’s three largest markets and a lot of bluster clouding things. Who needs who most? The buyer of flat screen TVs and cars or the seller? The country offering professional services like law and investments or the person benefiting from the advice?
We still believe they will come to an agreement because it is in everyone’s best interests. But mistakes have been made in the past and they could well be made again.
Source: FE Analytics, data sterling total return to 20 July
What are we doing here?
Discussions between the EU and UK are slightly different to those being fought about globalisation.
Rather than the UK butting heads about free trade per se, it’s the more ephemeral bits that are getting in the way. Most of us seem to be right behind the importance of trade (although, as always there’s a solid chunk of the country that’s dubious of open trade), it’s governance that’s causing rifts. Who should make our rules, how and what should they be?
Britain should govern itself, leavers say, and Europe gets in the way of that. Unfortunately, the EU is rock-solid on its principles, perhaps worrying that eroding them weakens the bloc and starts a slide away from its aims. European leaders have given absolutely no sign that they will compromise on the EU’s central tenets of open markets for goods and people underpinned by an equal playing field. Because, at its heart, that’s what the EU’s intransigence appears to be founded on. It wants to ensure that businesses in any part of its trading bloc have the same rules and compete on a fair footing. If the UK doesn’t have to follow labelling requirements enforced on other countries or doesn’t offer workers similar rights, it strips out a cost that leads it to undercut Continental rivals. Also, if the UK closes its borders to Europeans, is it really part of Europe and so should it receive the benefits that come with it?
You can make arguments of stubbornness, and others about efficacy of these rules – are they really fair? You can question whether a nation should have to abide a supreme foreign court. But the crux of it is that some people in the UK want the nation to stand apart from the Continent and forge its own destiny, regardless of the potential for economic pain. Others are worried about how the country will fare if it estranges itself from its closest major market. There isn’t much common ground there.
Perhaps it would be better if we were talking about what kind of society we want to be. For all the raging arguments about Brexit, they seem to be talking past the point. Sort of like haggling over what colour the walls of your house should be, rather than discussing what kind of home you’d like and in which neighbourhood. Norway-lite, hard Brexit, complicated regulatory equivalence arrangements for trade … they are all a bit indirect and ghostly. Important, no doubt, but not exactly proactive. The UK seems divided into two groups: those who think leaving the EU and quashing immigration will solve all our problems; and those who say that staying as close to the EU as possible will make everything ok.
We could be discussing how to improve our poor labour productivity and what options could become available without binding EU rules (or lost by leaving the bloc). Ways to encourage technological advances, support entrepreneurial spirits or sort out the railways. Brexit may be a way to strip workers’ rights because you think that’s the way to make the UK more dynamic. Or perhaps to go the other way and make the welfare state more generous. The future of the NHS, how to improve it – or scrap it, if that’s your opinion – could be planned properly. How to fix the housing market and ensure UK children learn skills to take on the 21stcentury could also be thought through.
It seems like we’re having the right conversation – one about the soul of our country – but perhaps we’re using the wrong language.
Bonds
UK 10-Year yield @ 1.23%
US 10-Year yield @ 2.89%
Germany 10-Year yield @ 0.37%
Italy 10-Year yield @ 2.59%
Spain 10-Year yield @ 1.31%
Economic data and companies reporting for week commencing 23 July
Monday 23 July
US: Existing Home Sales
Final results: Tungsten Corporation
Interim results: Ascential, JTC, Microgen, McColl’s Retail Group, SThree
Quarterly results: Ryanair
Trading update: Paragon Banking Group, Petra Diamonds
Tuesday 24 July
UK: CBI Industrial Trends Surveys
US: House Price Index
Final results: Fulham Shore, IG Group Holdings, PZ Cussons, Victoria
Interim results: Centaur Media, Drax Group, Fevertree Drinks, Gresham Technologies, Hammerson, Huntsworth, Spectris, Unite Group
Trading update: Britvic, Parity Group
Wednesday 25 July
UK: BBA Mortgage Lending Figures, CBI Distributive Trades Surveys
US: MBA Mortgage Applications, New Homes Sales, Crude Oil Inventories
EU: M3 Money Supply; GER: IFO Business Climate
Trading update: 3i Group, Antofagasta Holdings, Brewin Dolphin Holdings, Marstons, Victrex, Vodafone Group
Interim results: Burford Capital, Croda International, GlaxoSmithKline, ITV, Metro Bank, Rathbones Group, Tullow Oil
Thursday 26 July
US: Continuing Claims, Gross Domestic Product, Initial Jobless Claims
EU: ECB Interest Rate; GER: GfK Consumer Confidence
Final results: Diageo, Renishaw, Sky
Interim results: Anglo American, AstraZeneca, British American Tobacco, Countrywide, Franchise Brands, Intu Properties, Jardine Lloyd Thompson Group, National Express Group, Royal Dutch Shell, Relx, Robert Walters, Schroders, Segro, Smith & Nephew, Telefonica, Virgin Money Holdings
Trading update: Aveva Group, CMC Markets, Compass Group, Daily Mail & General Trust, Discoverie Group, PayPoint, Sage
Friday 27 July
UK: Nationwide House Price Index
US: GDP (Preliminary), Personal Consumption Expenditures, University of Michigan Confidence
Interim results: Equiniti Group, Jupiter Fund Management, Pearson, Reckitt Benckiser Group, Rightmove, UK Mail Group, Greencoat UK Wind