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So far so good

So far so good. We are in the midst of second quarter earnings reports in the US and so far good numbers are showing up. With just over 57% of companies reporting (as of Thursday July 27th), an above average 73% of companies are beating earnings expectations. Perhaps even more importantly, 71% are beating revenue estimates. Overall, the growth rates are currently trending at 10% on earnings and 5% on revenue. Outside of the Energy sector which has very easy comparables, the strongest earnings growth has come from Technology, Financials, Industrials, and Materials – cyclical sectors that also tend to be global in their revenue exposure. This likely speaks to the broad pick-up in economic activity around the world and a boost from currency translation as the trade-weighted US Dollar (DXY index) is down almost 10% for the year.

Meanwhile, the US equity markets remain at or near their historic highs. They need this earnings growth to continue to justify a P/E multiple that has reached 19x next year’s number (S&P 500) – especially at a time when it looks like fiscal policy is struggling to take the baton (indicated by the failure of healthcare reform) and monetary policy continues on a path of normalization (Fed communication this week emphasized balance sheet decline fairly soon). A 2.6% annualized growth rate for US GDP in Q2 announced on Friday helps, but it is going to have to pick up the pace if we are to take good to great.

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