US stocks will muddle on

With tepid economic growth and a strong dollar, US stocks may struggle. But they are unlikely to slide.

"Unless analysts are much more accurate than usual", the S&P 500's profits recession should be over, says the FT's John Authers. Following five quarters of contraction, profits are expected to have slipped by another 0.8% in the third quarter of 2016. But as analysts are usually "unduly pessimistic" to the tune of more than 3%, the final figure should turn out to be marginally positive. "It will have been the shallowest earnings recession on record, and also the only one not accompanied by a US recession or an equity bear market."

That's partly because it was less significant than it looked, as Ben Levisohn points out in Barron's. It largely reflected the slide in energy-sector profits amid the fall in oil prices. Strip out energy, and earnings expanded in three of the past four quarters. Similarly, S&P 500 profits margins slipped by 2% in the past year and a half, but take energy out of the equation, and margins have remained stable.

Nevertheless, it's hard to see profit growth taking off from here; the 10%-plus earnings growth pencilled in for next year will, as ever, be revised down as January approaches. According to Bank of America Merrill Lynch, only 21 S&P firms issued earnings guidance in the run-up to this earnings season, the lowest for any month since 2000, as Steven Russolillo notes in The Wall Street Journal. They are waiting to see what happens in the election, and this is likely to temper corporate investment over the next few months. Overall economic growth remains tepid and the dollar has strengthened; the S&P 500 firms make around half their sales abroad.

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Throw in high valuations, and stocks may struggle from here. But they are unlikely to slide. Interest-rates remain close to zero and companies are showering investors with money (instead of investing it). The S&P 500's total yield (the percentage of cash being returned to shareholders through buybacks and dividends) is around 4.7%, more than the 4.2% on corporate debt. US equities are set to muddle on.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.