Echoes of the late 1990s

At the beginning of the earnings season, I was sceptical on the ability of US companies to deliver decent earnings growth. I thought that given the global economic slowdown, cyclical stocks would likely disappoint and post negative earnings growth, while defensive stocks would do better. With the earnings season in the US now practically over, it is instructive to look at the final tally.

On average, earnings declined by 0.5% in the first quarter 2019 according to an analysis by FactSet, which was pretty much in line with what was expected by analysts going into the earnings season. For the second quarter 2019, analysts expect earnings to decline yet again, on average by 1.1% at the moment. But look beyond the headline number as our colleagues at FactSet have done and you will find some interesting developments. Rather than separating companies between cyclical and defensive sectors, they looked at the earnings growth of companies with more than 50% of sales outside the US vs. companies with more than 50% of sales in the US. The more domestically oriented companies in the US reported average earnings growth of 6.2%, thanks in large part to the strong US consumer. More internationally exposed companies, on the other hand, saw their earnings decline on average by 12.8%. These are predominantly cyclical companies in the IT and industrials sector that serve a global customer base.

This big difference between domestic and global companies in the US reminds me of the situation in the late 1990s when the global economy slowed down well before the US economy did. This slowdown started in 1998 with the Asian crisis and then spilled over to Europe and other regions in 1999 before ending the US expansion and causing a recession there in 2000. Today, the US economy remains strong compared to other regions, but we are again witnessing a slowdown in China and Europe that is manifesting itself in US corporate earnings. If this economic slowdown in Europe continues, it could eventually end in a recession in the Eurozone that, together with the negative impact of the US-China trade war, could push the US into recession in 2020. Whether this will really come to pass is unclear at the moment, and it will be important to see if the European recovery of the first quarter continues in the second and how well China can cope with the US tariffs given the massive stimulus that is being employed this year.

The international slowdown that led to the US recession in 2000

Source: Bloomberg, Fidante Capital.

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