Q2 US Earning Season to Overcome Political Risk?

In the previous earning season, Q1 2018, earnings reached the highest level in over 7 years at 24.6% on an 8.7% revenue gain. A solid economic backdrop and a boost from Trump’s tax cuts supported corporate America. 

Expectations

Expectations are running high once again for Q2 with momentum expected to continue and with recently released economic data adding to investor confidence. Q2 S&P 500 earnings as a whole are expected to increase 20% from the same period last year, on 8.1% higher revenues. This might provide some relief to investors as they continue to grapple with threats ranging from higher interest rates to escalating trade tensions between the US and China. 

Whilst first quarter financial results were a triumph they didn’t translate well into increased traction in stocks during the course of earning season. This was down to two factors, firstly, concerns over President Trump’s trade war policy and secondly concerns over increased borrowing costs. Neither of these issues has been resolved. The question is whether a strong earning season can do what it failed to do last time. This is, change market movement back into being earnings driven and fundamentals focused rather than reactive to political headlines.

Sectors to watch

The S&P climbed some 4% since the end of Q1 earnings finding support from tech stocks and energy stocks, whilst the Nasdaq has rallied close to 9% on tech fever. The Dow managed to rally 1000 points, however has since given these gains up thanks to lower industrials in light of the trade war.

All 11 sectors on the S&P are expected to report year on year growth with 7 sectors expected to report double digit earnings. The energy sector is expected to perform particularly well, hardly surprising given the recent rally in oil, across the second quarter. Tech stocks have also outperformed, driving the Nasdaq to multiple record highs over the past three months and are expected to see another bumper earnings season. 

With corporate tax benefits, a strong US economy and solid consumer confidence, corporate earnings are likely to get another boost this Q2 season, which could go some way to offset headwinds from trade war fears and rising interest rate concerns. A strong set of results could support the fragile rally in equity indices, which has faltered over recent weeks on rising US – Sino trade tensions.

Earnings vs. Political Risk

The markets have rebounded quickly from the most recent escalation in trade war stakes, suggesting that traders are still optimistic. This is key to earnings being able to distract market participants. Strong earnings numbers could capture the eye of traders and lift equity indices higher. 

On the other hand, given the current strains on the markets, any short comings in earnings could hit market sentiment hard. Politics is already putting pressure on risk appetite, keeping demand for stocks limited and investors jittery. Disappointing earnings figures could be the straw that breaks the camels’ back. That could pull 24,000 back into target for the Dow.