from the June investment comments of Provident Investment Management
Weakness in the global economy and a strong dollar has negatively impacted first quarter 2019 earnings for U.S. companies that do substantial business abroad. According to FactSet Research, with 90% of S&P 500 companies reporting, first-quarter EPS has declined 0.5% on a sales gain of 5.3%. However, for companies with greater than 50% of sales inside the U.S., the picture is much brighter, with earnings advancing 6.2% on a 7.3% sales gain. Conversely, companies with less than 50% sales in the U.S. have fared poorly, with earnings falling 12.8% and sales flat at 0.2% growth. These results prove it is in U.S. multinationals’, and investors’, best interests to make an agreement with China that clarifies the role of trade in the global economy.
As for all of 2019, analysts project S&P 500 aggregate EPS growth of 3.3% on a sales advance of 4.7%. The forward 12-month P/E ratio stands at 16.5, matching the previous five-year average and about 12% higher than the 14.7 observed over the past 10 years. Even flirting with all-time highs, the market isn’t particularly expensive. Further, there is quite a bit of pessimism for earnings growth built into these forward expectations.
Even with global uncertainty, the U.S. economy is performing well. First-quarter GDP grew 3.2%, the strongest advance for first-quarter growth in four years. This is good news as over the last few years the first quarter has recorded lower levels of growth when compared to the second through fourth quarters, pointing to possible issues with seasonal adjustment factors. However, a concern for the quarter is the composition of growth that favored a strong showing from net exports and some building of inventory versus a weaker showing for consumption, which represents about 70% of GDP.
There is good reason to believe consumers will step up purchases going forward. In April, the economy added 263,000 jobs and the unemployment rate fell to 3.6%, the lowest level since December 1969. Average hourly earnings were up 3.2% year-over- year. When coupled with low inflation, workers continue to get a real increase in wages. The other benefit from low inflation is that it keeps the Federal Reserve from feeling the need to raise interest rates, even in the face of low unemployment.
While trade concerns dominate the headlines, there is reason to believe that a little good news could boost the market further as valuations are reasonable and expectations are modest.