Amid escalating trade worries, the S&P 500 is back to the 2800 level while the Nasdaq Composite and Russell 2000 indexes set new record highs last week. The optimism came on the back of strong earnings growth and the perception that American stocks are largely insulated from potential trade wars.
Earnings for about 17% of the S&P 500 members that have reported Q2 earnings so far are up 20.9% from the same period last year on 10.3% higher revenues, with 86.2% of the companies beating EPS estimates and 77% surpassing revenue estimates. Investors should note that the proportion of positives surprises is tracking materially above historical periods. Overall, total earnings are expected to be up 21% on 8.3% higher revenues, with double-digit earnings growth for 11 of the 16 Zacks sectors (read: 5 Excellent ETF Plays as Q2 Earnings Cycle Begins).
A slew of positive economic data, which indicate a healthier economy with a solid job market and desired inflation rates, have added to the strength.
However, the threat of full-blown trade war is looming large with Trump’s intention to slap import tariffs on all $505 billion of Chinese goods. Both the United States and China levied taxes on $34 billion of each other goods, effective Jul 6. The Federal Reserve’s Beige Book survey of businesses shows that the companies have started to feel the pressure of higher costs of raw materials thanks to tariffs on steel and lumber. As a result, the trade disputes could undermine economic growth, triggering a global recession.
Additionally, Trump in a tweet ramped up its antitrade policies on American trading partners, citing that the European Union and China are manipulating their currencies, and putting the United States at a disadvantage. He also criticized the Fed’s rate increase policy saying that higher interest rates are reducing the effect of massive tax cuts intended to boost U.S. economic expansion in its ninth year and are making the United States less competitive.
