US earnings season officially kicked off last week, and through yesterday approximately 15% of the S&P 500 has reported results for the second quarter. This earnings season is especially interesting because recent economic indicators, both domestically and abroad, point to signs of slowing growth and more challenging corporate conditions, some of which have been acerbated by the recent tariff dispute between US and China. This is the first earnings season that we will hear directly from corporate management teams regarding the impact of trade tariffs and how they assess the associated headwinds to full year financials. While still very early in the reporting season, the good news is that earnings have been better than feared. The EPS growth rate for the second quarter is trending toward +2.3%, which is a slight improvement relative to the -2% growth rate expected only a few weeks earlier.

Surprisingly US financials have posted stronger than expected results due to a robust lending environment, tight expense controls, and aggressive share buybacks. Credit conditions remain sound, putting to rest any concerns that the US consumer is showing signs of fatigue. While the consumer appears healthy, earnings weakness from US railroads highlight some of the challenges that the US industrial sector is facing. CSX lowered full year guidance this week due to macroeconomic and trade uncertainty, sending the stock down 10% on the day. The disparity in earnings reflects the bifurcation that the US economy is experiencing since the trade dispute began last year.  Adding to the noise, the continued shutdown of Boeing’s 737 fleet has also damaged trade – airlines are a significant manufacturing segment with ripples through a variety of industrial areas.

Recent trade policies have slowed several cylinders of the US economic engine, leading to declining economic forecasts for the full year despite a healthy consumer. We continue to be optimistic that US and China trade relations will improve in coming months healing the US industrial sector and business confidence. Until then, we expect a choppy environment for the foreseeable future with heightened earnings volatility. Our view is that the US consumer will finish strong after a noisy start to the year, but ultimately the industrial sector needs to fire up again for this economy to get back to a growth rate that soothes investors and extends the cycle.

Will Skeean, CFA

Partner – Investment Management Team Chair