A few days ago Ed Yardeni gave a summary of some good news as well as some bad news as it pertains to S&P earnings.
All of these points are worth monitoring on an ongoing basis.

On the good news side there is:
(1) “Rebounding M-PMI. The good news is that the US M-PMI rebounded during January after taking a dive during December, as we discussed yesterday. This business indicator is highly cyclical and also highly correlated with S&P 500 aggregate revenues. The M-PMI is also highly correlated with the yearly percent change in the S&P 500.” M-PMI is the Manufacturing Purchasing Managers Index.

(2) Rebounding new orders. That’s not surprising since both the S&P 500 and the new orders sub-index of the US M-PMI are among the 10 components of the Index of Leading Economic Indicators (LEI).

(3) A surprisingly good year. S&P 500 aggregate revenues rose 9.0% y/y during Q3, and 10.7% on a per-share basis. Joe and I previously have marveled at the strength of revenues growth last year despite all the chatter about a slowdown in the global economy. A rebound in oil prices helped to boost revenues. However, the S&P 500’s aggregate revenues was up 7.5% even excluding the S&P 500 Energy sector.”

On the bad news side however:
(1)” Global M-PMI falling. The global M-PMI fell to 50.7 during January. That’s down from a recent peak of 54.4 at the end of 2017 and the lowest since August 2016. (Excluding the US, the global M-PMI slumped to the 50.0 breakeven point.)

(2) Global leading indicators weakening. As Debbie and I observed last week, the LEI in the US stalled at a record high during the final three months of 2018. We expect it made a new record high last month, led by the S&P 500 and the M-PMI’s new orders index. The bad news is that the LEI for the 36 member countries of the OECD continues to weaken, as it has been doing since February when it was at 100.4. It was down to 99.3 during November. This global business cycle indicator is also highly correlated with the growth in S&P 500 aggregate revenues, and does not augur well for revenues growth. However, the two series have diverged from time to time.

(3) Commodity prices get a boost from the Fed. The one bright spot for the global economy is the price of copper. It is starting to shine again. It is very sensitive to US monetary policy and Chinese economic growth. The nearby futures price has rallied from a recent, January 3 low of $2.568 per pound to $2.805 yesterday. Like the stock market, the price of copper is responding positively to the more dovish approach to monetary policy and Trump’s cheerleading on the progress in US-China trade talks.

(4) The dollar remains a headwind. The prices of most commodities traded globally in dollars, including the price of copper, are inversely correlated with the foreign exchange value of the trade-weighted dollar. If the Fed pauses hiking rates for a while and US-China trade talks end amicably, the dollar should weaken, or at least stop strengthening. That would be a positive for the growth rate of S&P 500 revenues, which is inversely correlated with the dollar.”

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