INSIGHTS

STRONG RESULTS TRUMP WEAK ECONOMIC DATA IN THE US

Mark Lister, 3 May 2017

The economic data we’ve seen out of the US has been noticeably weaker in the last month or so, yet the US sharemarket has continued to post healthy gains. I put that down to a very strong corporate reporting season, which has seen US companies post the strongest profit growth in almost six years.

Things have definitely come off the boil in Donald Trump’s part of the world. It started with the March jobs report, which was well below expectations and the lowest since May last year.

Retail sales and manufacturing indices have also missed economist forecasts, while the March quarter GDP report saw annual growth fall to just 0.7 per cent, the slowest in three years.

Despite all that, US shares have barely reacted. In fact, they’ve gone up for the most part. The Nasdaq is at an all-time high, while the Dow Jones and S&P500 indices are within one per cent of their previous records.

For investors, one thing more important than the economy is what the companies they own are saying themselves. At the moment, the news on that front looks overwhelmingly impressive.

With the quarterly reporting season drawing toward a close, annual profit growth in the US is averaging almost 13 per cent. That’s quite impressive, given growth in four of the last six quarters was negative and the last time we saw a double-digit increase was way back in 2011.

It’s not just a cost cutting story driving bottom line profits either, with almost two thirds of companies reporting better top line revenues than analysts were predicting.

The technology sector has been one of the standouts, with the likes of Google, Amazon, Microsoft and Visa all posting very good numbers. Tech has been the best performing segment of the US market in 2017, with share prices rising almost 16 per cent, more than double the S&P500 index.

Tech companies have the biggest exposure to international markets, with more than 50 per cent of total revenues coming from outside the US. Maybe a softer US economy hasn’t made much difference, given the very wide spread of end markets these companies operate in.

Europe, for example, has recently found a new lease of life in economic terms. One high-profile activity indicator rose to a six-year high last month, with new business measures looking strong and firms taking on extra staff at the fastest rate in nearly 10 years.

Stepping back from the short-term noise of monthly economic releases, the US is still in very good shape. Growth is steady, and it will probably rebound over the coming months. Seasonality plays a part, and the March quarter always tends to be a little disappointing.

Besides, it’s hard to get too negative about the world’s biggest economy when corporate profits are providing such good headlines.

One of the best leading indicators of all is what bosses are saying about the prospects for their own businesses, and at the moment outlook statements are much more upbeat than recent economic data suggests.