Corporate Earnings vs. Tariffs – Which Will Win Out?
As we enter a holiday weekend, good news seems to be a common theme with corporate profit earnings soaring and the GDP estimate for Q2 stronger than expected. Read on to get all the details…
Corporate Profits Soaring — the Commerce Department published its latest measure of corporate profits in the second quarter, and the results were as solid – or even more solid – than most anticipated. The Commerce Department’s broadest measure of after-tax earnings across the U.S. jumped +16.1% in Q2 from a year earlier, which marks the biggest year-over-year increase in six years. Economic growth momentum contributed to the gains, which could easily be tied to impact felt from the massive cut in corporate taxes at the turn of the year – companies paid 33% less than a year earlier. That being said, investors should bear in mind that the strong tailwinds of tax cuts are arguably transitory in nature, meaning we could see the short-term boost fizzle off in the coming quarters.1
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GDP Figures Revised Higher – in another bout of good news this week, the Bureau of Economic Analysis revised their estimate for second quarter GDP higher, to a rate of 4.2%. That was stronger than the advance estimate given a few weeks ago of +4.1%, indicating that even with further revisions we can reasonably expect the strong growth rate to stick. In the first quarter, real GDP increased 2.2%. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $72.4 billion in the second quarter, compared with an increase of $26.7 billion in the first quarter.3
Nearing a NAFTA Deal – details of a new deal reached with Mexico emerged this week. Among them a requirement that car companies manufacture at least 75% of an automobile’s value in North America, up from the current 62.5%, and also a requirement that a set amount of auto components be made by workers earning at least $16 an hour. Critics argue that these new terms create a form of ‘managed trade,’ whereby governments and rules dictate how cars should be made, down to wage levels. In a sense, a tilt away from free trade and free market economics. Perhaps the biggest feature of the proposed deal, however, was the absence of Canada. The Trump administration signaled its willingness to move forward without Canada if a deal could not be reached by Friday, though gaining such approval from the U.S. Congress will likely face uphill battles.4
Farm Bailout – in one of the more visible fallouts from the ongoing global trade disputes, the U.S. agriculture industry is feeling the impact of retaliatory tariffs, particularly on soybeans. In response to the losses, the Trump administration is prepared to launch an emergency agriculture plan worth about $6 billion in aid for farmers, to begin after Labor Day. There is a bit of irony in bailing out an industry due to tariffs that were supposed to help American enterprises, and some farm groups are even warning that the additional government spending won’t make up for losses from trade clashes.5
Want to learn more about the ever-changing market landscape, look no further than our Just-Released Market Strategy Report.6 This report will give you an inside look into key economic factors.
If you have $500,000 or more to invest and want to learn more, click on the link below to get your free report today!
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion
3 BEA, August 29, 2018, https://www.bea.gov/news/2018/gross-domestic-product-second-quarter-2018-second-estimate-corporate-profits-second
4 The New York Times, August 27, 2018, https://www.nytimes.com/2018/08/27/us/politics/us-mexico-nafta-deal.html
5 CNBC, August 27, 2018, https://www.cnbc.com/2018/08/27/trump-farm-bailout-to-provide-6-billion-dollars-in-initial-relief.html
6 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion
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