Coronavirus scare obscures US profit picture

With the spread of the coronavirus occupying the news, investors may have missed some interesting developments in US corporate earnings

“Earnings season is fast being forgotten” amid “cascading fear” of the coronavirus, write Elena Popina and Lu Wang for Bloomberg. Investors would usually spend the end of January scouring the latest quarterly earnings reports. Instead the market is “ruled by anxiety”. Even “surprisingly strong earnings” from market stalwarts Apple and Amazon have failed to cheer people up.

It is worth keeping an eye on US corporate earnings all the same. As Maggie Fitzgerald notes on CNBC, at over 200%, “the size of the stockmarket relative to the size of the economy is at an all-time high”. On another measure, the cyclically adjusted price/earnings ratio, US stock have not been this expensive since the 2000 dotcom bubble.

Unless corporate profitability picks up then those heady valuations risk crashing back down to earth. In 2019 third-quarter earnings fell by 0.4% year-on-year. If the fourth quarter is also negative then earnings will have fallen into recession. Yet the current earnings season has been “better than you think”, says Jack Hough for Barron’s.

With two-thirds of S&P 500 companies reporting, profits that were predicted to fall 1% in the fourth quarter are down by just 0.3%. Still negative but going in the right direction. In 2020 first-quarter earnings growth should hit 4% as energy and tech stocks work through temporary setbacks that hampered 2019. “Not quite olé! but still OK.”

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