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What's come out of the latest US earnings season?

15 February 2019

We are two thirds of the way through American companies reporting their full year and fourth quarter 2018 earnings. Despite the Grand Old Duke of York nature of the US (and other) equity markets in 2018, marching up to the top of the hill and all the way back down again, it was a very good year for companies. In terms of profits, the cut in the headline US corporate tax rate at the end of 2017, from 35% to 21%, added some nitro-glycerine to growth. Net profit for the 357 members of the S&P 500 Index to have reported so far, rose +22% over the year on an impressive +10% increase in sales. Indeed, it is this sales growth that is particularly impressive, as there's no direct impact from tax changes and it's a big number for US companies to grow by. Growth did slow through the year though, with +9% annual growth in sales in the first quarter becoming (a still robust) +7% in Q4 2018.

Oil, tech and basic materials companies all posted over 10% sales growth in 2018. Consumer goods companies, however, struggled to eke out profit growth, as the Amazon juggernaut, which accounts for 50% of all online retail sales in the US, made 'shops' seem "so last decade". My colleagues and I read and listen to a lot of companies' earnings conference calls, and for the most part US management seem sanguine about their own economy, which appears to be humming along, government shutdown or not. What has been clear since the middle of last year though, is that the ongoing trade spat with China is causing problems. Companies are reporting slowing sales in China, less investment and very little clarity from customers about future orders. Everyone awaits a resolution. The sooner the better, whatever that may be so that management, who hate nothing more than uncertainty, can finally start trying to plan for 2019 and beyond.

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