Earnings Season to Provide Clarity on the Economy
In last week’s Market Update, we discussed the importance of this earnings season. For most of the year, there have been two school of thoughts; either things are not going well in the economy and a recession is near or the growth in the U.S. economy is not great, but it is still moving forward and a recession is not imminent.
The analysts that believe things are not good and the economy is headed down, quote the slowdown in manufacturing in the U.S. and around the world. The analysts on the other camp that state the economy is still growing and things are ok for now, quote the strength of the consumer and its ability to continue to drive positive real GDP growth.
The Surevest Investment Committee has looked at both sides and the data has shown that the consumer contribution to GDP is still strong. To put it in perspective, consumer consumption accounts for 70% of GDP, while manufacturing accounts for much less. Therefore, even though there is a contraction in manufacturing, if the consumer, which accounts for the biggest contribution to GDP, is moving forward, a recession is not near.
This earnings season is expected to provide more clarity around the two school of thoughts and that is why this season is more important than the previous ones. As of Thursday’s close, 192 companies in the S&P 500 have reported earnings and of those that have reported, 82% have reported positive earnings surprise while 63%, have reported positive revenue surprise. One thing to note is that not all companies are affected by the same risk factors. For example, companies that generate more of their revenue from the U.S. are reporting better numbers than companies that generate most of their revenue from outside the U.S.[i] Also on a sector level, the Information Technology sector has reported the biggest surprise in earnings (90%), while the Energy sector has reported the smallest surprise in earnings growth (66%).
As we mentioned in our quarterly commentary, in this environment it pays to be an active manager with a rigorous research process because it allows us to select the companies that are likely to outperform. The broad indexes are not cheap, but within the index there are good companies with strong fundamentals at attractive prices. The Surevest Investment Committee has and will continue to focus on finding these types of investments for our portfolios.
[i] Source: FactSet