U.S. Corporate Earnings May Slow
US corporate earnings have been on a tear lately. In the first quarter of 2018 U.S. corporations increased their earnings by 25%, the fastest rate since the second half of 2010. However, earnings rates are expected to slow down going forward. In the second quarter of 2018 earnings are expected to grow at a 19% rate and slow to 17% by the fourth quarter. The reasons for the slowdown are twofold. One is that the Federal Reserve has raised interest rates twice in 2018 and is expected to raise rates another two times before the end of the year. Higher interest rates could hurt the earnings of companies as it increases their expenses. The other reason for slowing earnings is due to the tariffs and threat of trade wars which could greatly curtail US exports and cause prices for goods and services in the U.S. to rise.
Just because earnings are slowing down does not mean that the US stock market will correct. The U.S. economy is on very strong footing and is continuing to grow. Unemployment remains below 4%. And finally, the U.S. stock markets looks quite attractive compared to its foreign counterparts.
We will be keeping a close watch on earnings as the year progresses and will be prepared to make changes to client portfolios depending on what happens.