ISIS Asset Management says corporate earnings in the US should stay strong through this year, but adds there are still dangers in the form of continued high unemployment and the weak dollar.
The optimistic view on earnings runs counter to a general view that the second half of this year will see a deterioration in earnings growth as the impact of tax cuts and corporate cost-cutting diminishes, ISIS says.
David Currie, its director head of North American equities, believes earnings momentum will be retained, and that the productivity gains of the past couple of years linked to the strengthening recovery will enable companies to keep growing earnings.
With more than 500 companies to choose from to populate the North American portfolio he is in charge of, Currie says there are many good stories worth buying into, which are also trading at valuations his team feels are reasonable.
Many promises will be made by politicians in this, a presidential election year, but whoever wins the race, they are likely to be forced into fiscal belt-tightening in order to cut the federal deficit to manageable levels, Currie adds.
Steven Andrew, director economist, says of the unemployment story that one problem is a lack of relevant data.
It is not possible, for example, to get sufficient data on whether jobs have been shifted offshore to countries with lower labour costs, implying firms are still making profits on output, but without contributing to new job creation in the US itself.
Corporate capital expenditure is up, but wage growth is lagging along with a lack of savings, which could spell trouble ahead in terms of weaker consumption.
The weak dollar feeds into the equation in terms of its impact on consumers. However, there is little evidence US consumers are limiting their spending on imports, despite the falling dollar.
US exports are meanwhile suffering the fact the US economy is growing faster than just about any other developed economy. Turning the dollar around will require demand for dollars to increase – historically because people elsewhere need to buy things priced in dollars – but the factors above reduce the likelihood of this happening at present.
Inflation in the US is unlikely to start increasing until early 2005, Andrew adds.IFAonline
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