The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Tiny Crack

09/27/2018

There is a tiny crack in the Fortress Economy of the United States.  Corporate earnings per share (EPS) are slowing.  They have been increasing at a 25% annual rate so far this year, but that is obviously not a sustainable rate.  It has to slow down somewhat.

Most companies try to manage expectations and provide “guidance” on what they expect their EPS will be each quarter.  Of the 98 companies who have offered guidance so far, on their third quarter earnings, 74 of them expect their earnings growth to be slower.  That does not mean they will report a loss, only that the increase in their earnings will be less than expected.

Does that mean our economy has peaked and that we are entering a recession?  NO!  More likely, it means we may be entering a “profits recession,” which means the annualized percentage increases are not as large.  That’s what happened in the first quarter of 2016 – a mere two and a half years ago.  (Do you even remember it?)  After that drop, EPS began improving again.  But, of course, the stock market over-reacted at the time and dropped, because that’s what the stock market does — it over-reacts!  Unfortunately, so do investors!

As for me, I am not so interested in their earnings growth, as I am their comments about the growing trade war.  That could turn a tiny crack or a normal “profits recession” into something worse!

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