Tune Out the Noise of a Trade War

by Laura Ehrenberg-Chesler on June 20, 2018

in Earnings,Economic Indicators,equity market,Geopolitical

From our favorite economist Ed Yardeni:

Trump’s approach risks escalating the trade skirmishes into an all-out trade war, which would depress global economic activity. Now let’s try to tune out the noise of war and find some peace and quiet:

(1) Forward earnings. Notwithstanding all of the above, Joe and I continue to focus on the strong signal coming from S&P 500/400/600 forward earnings (Fig. 1). All three rose to record highs in mid-June.

The forward earnings of the S&P 500 is up to $168.40 per share, quickly approaching our target of $170 for the end of this year (Fig. 2). Barring an all-out trade war, that level seems easily achievable, since forward earnings will equal the consensus expectation for 2019 by the end of this year. That expectation has been rising ever since the cut in the corporate tax rate at the end of last year. It was $176.94 in mid-June.

(2) Forward revenues. We guess that industry analysts haven’t gotten the trade-war memo yet. Their forward revenues estimates for the S&P 500/400/600 continued to climb to fresh record highs in mid-June (Fig. 3). The upward slope is particularly steep for both the forward revenues and forward earnings of the S&P 600 SmallCaps.

(3) Profit margins. The S&P 500 forward profit margin continues to rise in record-high territory (Fig. 4). It was 12.2% in mid-June, up from 11.1% during the December 14 week, just before Trump’s tax cut.

(4) Bottom line. Our bottom line is that while the noise continues to drown out the signal, the signal remains strong enough so that stocks have held up quite well despite the noise of war. We expect that the noise will diminish as the mid-term congressional elections approach. Trump can’t afford to lose the House, especially to Democrats aiming to impeach him. He also needs the economy to remain strong and the bull market in stocks to remain intact.

Trump never learns from his defeats because he never admits that he has been defeated or stalemated. Instead, he pretends he has won and moves on (“Won-and-On Don”). He may very well do the same with the Chinese, accepting their initial concessions—as noted above—and moving on. He did that with North Korea, which remains a nuclear power despite Trump’s summit with NoKo dictator Kim Jong-un. But Little Rocket Man hasn’t launched a missile since late last year.”

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