(Drivebycuriosity) - US Companies had a stellar earnings season. In the first quarter of 2018 earnings for the big US companies, which are represented in the SP 500, grew about 25% from the same period last year - and 78% beat the earnings estimates of the analysts (nasdaq). But the US stock market ignored the rising profits and has been stagnating in the recent months. Apparently Wall Street cares more about climbing interest rates & Trump`s trade war against China and underestimates the strength of the earnings growth (zacks).
I think this is a big mistake. I assume that the strong earnings growth will continue in the coming quarters and will restart the rally on the stock market. A part of the earnings growth is the result of the recent tax cuts of the Trump administration, about 7 percentage points estimates LPL research, which reduces the (basic) earnings growth rate to about 18%. I think that company earnings will continue to grow with double-digit rates because fast rising company earnings are a long term trend.
Corporations are getting more efficient & more
productive over time - thanks to
learning processes and the technological progress. Companies are learning
organisms because they are managed by humans who are continuously improving themselves
and their companies. During the
recession 2008 companies had restructured and
reduced costs significantly in order to survive. Now they are more fit
& more efficient than before.
Company earnings are also boosted by automation. Since the early 18th
century (the first industrial revolution) the technological process has
been enabling companies 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, higher profit
margins and climbing earnings.
It seems that this process is accelerating again and we are at the begin
of new industrial revolution. We are experiencing a rapid advance of
information
technology, meaning combinations of computers, smartphones, Internet and
other digital systems. Software - which is increasingly Internet
connected and uses more and more the cloud (access to huge external data
centers) - organizes the whole business: Creating new products,
inducing machines to run more efficient, finding cheap suppliers, manage
customer relations and so on. Car producers and many
other manufacturers are increasingly using robots and similar machines
to reduce their costs. Companies are also beginning to use 3D-printers
to
become more cost efficient and flexible.
Company profits are also boosted by the rise of the
emerging markets. China, India & Co. create additional markets. Therefore
companies can produce more which translates into shrinking average
production costs (economies of scale). Emerging markets also deliver
cheap supplies (most computers, tablets & smartphones are
manufactured there) which reduces the production costs further.
I believe that the learning
process will continue and will translate into a long term trend of fast rising
company profits, the engine of the stock market rally. And history shows that stock
prices & interest rates can happily rise together: The Bank of
America Merrill Lynch (finance)
notices that “the 1950s was a period of higher stock prices and higher
US interest rates. The US 10-year yield bottomed near 1.5% in late 1945
and the S&P 500 remained firmly within its secular bull market until
yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460%
over this period.”
Enjoy!
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