Tuesday, January 5, 2016

Economy: Don´t Depreciate The Earnings Season

(Drivebycuriosity) - The stock market started the year in an extremely pessimistic mood. The already gloomy sentiment got worsened by disappointing manufacturing data from China and the US. But I think that the earnings season, which will start in the coming days, will change the sentiment and could rekindle the bull market.

I suppose that company profits will surprise positively. Don´t believe the headlines that "the profits" of the US companies are falling in general (marketwatch). The picture is blurred by the energy sector that has to deal with dropping oil & gas prices. The rest of economy is doing well. Many companies benefit from lower transport costs and from cheaper oil, steel, aluminium and other commodities which reduce their costs significantly. Lower prices for gasoline, heating oil and natural gas enable the consumers to spend more money for other goods & services. Especially technology companies like Microsoft, Alphabet (former Google) and Amazon plus the consumer discretionary sector should overcompensate the weakness of the energy sector.

The pessimistic majority also underestimates how efficiency gains and technological progress enable companies to create rising earnings even in a sluggish economy. Companies are learning organisms. They are managed by humans who are getting better and better over time by continuously improving themselves and their companies. This is part of the evolution process described by Charles Darwin.
As a result, companies also are getting leaner and more efficient all the time - the survival of the fittest (the term was coined by Herbert Spencer wikipedia). The 2008 recession especially forced them to squeeze out a lot of their costs, which now leads to strong productivity gains. Helpful is the technological progress: New developments in Internet, business software, robotics and more are used to reduce costs continuously. Many companies benefit from a new industrial revolution. Since the early 18th century automatization has been enabling them to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs and higher profit margins.

I think that US, European and Chinese companies also will get a boost this year because the global economy (macro environment) will recover from last year´s soft patch thanks to technological progress, cheap commodities and low interest rates.

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