by Franklin J. Parker, CFA
Earnings, earnings, earnings, earnings, earnings! With the Fed having given a clearer path for rates, investors are watching earnings very closely. It appears that earnings are only expected to grow about 3.5% — which is lower than we thought before earnings season began. As I mentioned last week, earnings growth is concentrated in one or two sectors (technology and communication services), which belies some underlying weakness in the economic growth story.
This week we see data on durable goods orders and we enter the thick of earnings season, with major companies like General Electric, Verizon, 3M, Boeing, Tesla, IBM, and many others reporting. As I have said before, for this market rally to continue, we really need to see meaningful earnings growth across the board (10% to 15% growth).
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I am growing a bit more optimistic. There are still underlying weaknesses in the economy — the yield curve remains inverted and unemployment levels have moved in a recessionary way. However, if earnings growth can catch on and unemployment levels stabalize, I may shift my outlook from cautious to optimistic.
Chart of the Week
Private Inventories are a key component of the economy. When businesses are not optimistic, they tend to stop ordering excess inventory, and sell down existing stock. That said, this figure is also one of the components of GDP itself, so it is much more of a coincident indicator. As you can see, after contracting last year, inventories have begun to climb again this year.
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