This week is a big week for markets. The Federal Reserve meets this week, we see data on employment and economic growth, and we are in the thick of earnings season. A lot to digest!
We are about a third of the way through earnings season. It appears companies will grow earnings by about 7%, which is right about average. Investors are listening to earnings calls for hints about coming quarters as the trade war and deteriorating economic data are both taking their toll on forecasts (more on this in this week’s chart of the week).
This past weekend, the Trump administration reached a deal with the European Union, settling on 15% tariffs on EU imports to the US. Steel and aluminium will be taxed at a 50% rate, however, and there remains some provisions to still be hammered out. The EU agreed to purchase $750 billion worth of energy products (oil, natural gas, and nuclear fuel) and invest $600 billion in US infrastructure and military equipment over the next three years. To put these figures into perspective:
- Total US oil & gas production totals around $480 billion per year. Assuming that most of the EU’s committed purchases are of oil & gas, this commitment represents about half of total US production per year — a substantial increase in demand for US producers.
- The US exports around $118 billion worth of military equipment every year. If we assume that around half of the EU’s committed $600 billion figure is slated for military equipment, that would represent an almost doubling of military exports over the coming three years.
There are several investment takeaways from this deal, and we will begin implementing those in our portfolios over the coming weeks, though many questions still remain (not the least of which: how can these numbers possibly work?).
Investors expect the Fed to hold rates steady at their meeting this week, though all ears will be tuned to hear any changes in the pace of cuts. At the moment, the market is split between a cut in September or a cut in October.
And, lastly, we are watching the employment very closely this week. So far, US employment has been getting steadily worse, with more people leaving the labor force than finding jobs, and several prominant job cuts coming up.
Overall, while the recent trade deals may be a boon for certain sectors, we still see higher prices to consumers at a time when consumers are strained. The economic data is still negative, but markets have continued to climb to new highs. In our view, this is a time to evaluate where and how you are taking risks.
Chart of the Week
This week’s chart demonstrates the impact of tariffs on global companies. By far, the most common action in the US has been to cut and withdraw earnings guidance, with many companies simply stating they expect to make less money.
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