American companies are posting “stellar results”, but the stockmarket has reacted with a shrug, says Patrick Mathurin in the Financial Times.
Most have now reported their second-quarter earnings.
The April-to-June quarter marked the peak of the reopening boom; the world’s biggest economy grew at an annualised rate of 6.5% as restrictions were lifted and consumers spent their government-funded stimulus cheques.
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Corporate America counts its cash
Profits at 87% of firms have beaten analysts’ forecasts so far, says Karen Langley in The Wall Street Journal. That is the highest level of “earnings beats” in more than a decade. At the start of April, Wall Street analysts thought that second-quarter earnings would grow by 53% compared with a year before.
That figure now looks closer to 90%. Companies have proven adept at “growing their sales while managing their costs”. US blue chips have been using their size and pricing power to pass cost increases directly onto consumers: McDonald’s reports raising menu prices “about 6% over the past year”, but sales still rose.
On 28.1 times trailing earnings, the S&P 500 is trading at “a level unseen since the dotcom era”, says Ben Levisohn in Barron’s. But that doesn’t mean things have to end in tears. A stockmarket implosion is one way to pop a bubble, of course. But another is for earnings to grow so that valuations start to look more reasonable.
These strong results are a step towards this more benign outcome. “None of that precludes a correction along the way really, one should be expected – but as long as the economy keeps growing, the stockmarket should ultimately be OK.”
Inflation ahead
The S&P 500 stock index has soared by almost 20% this year, while as of 3 August the index had notched up a staggering 42 record closing highs this year. Traders are losing enthusiasm, though, says Mathurin. Take Apple: its earnings beat expectations by a massive 28%, but its shares reacted to the news by falling slightly. The reason? “Investors may not view this season’s earnings growth as sustainable”. As inflationary pressures take hold many think corporate margins could shrink.
Those pressures are only growing: this week the US Senate moved a step closer to approving trillions of dollars in new infrastructure spending (see page 10). A new injection of cash will keep the economy running red hot. The jobs market is also showing signs of inflation.
The economy added more jobs than expected last month, with nonfarm payrolls up by 943,000. Unemployment fell to 5.4%. Restaurant owners complain that they just can’t get the staff, even if they raise wages.
Payrolls are still “5.7 million lower than before the pandemic’s onset”, says Randall Forsyth in Barron’s. But that “gap is closing rapidly”. The Federal Reserve says it will only tighten monetary policy – which is still in crisis mode – once there is evidence of “substantial further progress” towards recovery. How does nearly “a million new jobs” in a month sound?
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