- KPB & Co Research
As the market gears up for the US Federal Reserves' monetary policy direction, and more investor earnings calls, recent economic growth numbers is leading to a degree of uneasiness, particularly given the decline in corporate profits seen in Q1 of 2019. The Bureau of Economic Analysis provided data on GDP growth on Friday, and on corporate profits a month ago, where GDP growth was estimated at 2.1% for Q2 of 2019 after registering 3.1% in Q1 of the same year. Data on corporate profits show that American companies felt the pinch of higher interest rates, the run-off of the Fed's bond buying programme, and the uncertainty around trade negotiations with China in Q1 of 2019. Corporate profits adjusted for inventory valuations declined by US$31.4Bn in Q1, with most of the weakness concentrated in a few important industries. As investors look at what to expect about corporate earnings over the next few weeks, these data points will weight heavily on the forming of investor expectations.
As a reminder, overall corporate profits declined by US$31.4Bn in Q1-19 relative to the previous quarter Q4-18. A look on corporate profits across industries, show that four particular industry categories were responsible for the decline. "Petroleum and coal product" companies lost about US$45.4Bn in profits, while "chemical products" lost US$12.5Bn. The decline in profits from these industries reflected the 38% decline in oil prices from US$74.3/Bbls. Oil prices today are still lower than the level established in Q3-18. There were also declines in "wholesale trade", and "transportation and warehousing" of US$6.8Bn and US$12.5Bn respectively. An intensification of the trade war, and the resulting uncertainty led to a slowdown in the movement of goods across the US, and among its major trading partners.
Going forward, the US federal reserves and investors alike are growing increasingly concerned about further declines in corporate earnings. This earnings season kicked off with mixed earnings for the week that started July 21, 2019, where some companies performed above expectations, while a similar number of companies performed below. Facebook (below estimates by 0.97 per share), Snapchat (beat estimates by 0.04 per share), Twitter (beat estimates by 1.4 per share), Amazon (below estimates by 0.35 per share), Starbucks (beat consensus by 0.06 per share), McDonalds (on target 2.05 per share ) were some of the big names that presented earnings this week. Going into next week some of the notable companies that will present earnings include Beyond Meat, Apple, Chevron, Under Armour, and Verizon. Should corporate earnings turn out to be dismal, investors could revaluate growth estimates going into Q3, leading to a much slower increase in market indices.