Business Investment Accelerates
As we near the halfway point of 2018 several themes are emerging. Let's take a look.
Business Investment
After years of virtually no capital expenditures, businesses have significantly accelerated investment into things new buildings, equipment, vehicles and software. One of the biggest reasons for increased investment is due to the tax cuts that took place January 1st, 2018. During 1st quarter earnings reports, company after company have cited the tax cuts when asked what was driving increased investment.
From Reuters:
"U.S. companies could plow more of the money saved from sweeping tax cuts into business investment later this year, perhaps even surpassing a jump in first-quarter capital expenditure that was the highest in almost seven years, strategists and analysts said.
Higher spending on technology, equipment and facilities could ease worries that S&P 500 companies have reached a peak in the profit growth investors are counting on to extend the nine-year bull market in equities.
With data in from 94 percent of S&P 500 companies, first-quarter capital expenditures total $159 billion, up more than 21 percent from a year ago and on track to be the highest year-over-year growth since the third quarter of 2011, according to S&P Dow Jones Indices data."
Earnings Growth
When all was said and done 1st quarter earnings grew at a blistering 26.5% pace. After earnings growth had flat-lined in 2015 & 2016 financial analysts are forecasting growth of almost 20% in 2018. This would be an impressive number on the heels of 14% growth in 2017. Tax cuts, deregulation and consumer confidence in the economy have all played a role in the earnings surge.
Not only were 1st quarter results impressive, but we saw the highest spread between companies rasising their earnings forecast and companies lowering their earnings forecast since 2003.
Small Business Optimism
Given that small businesses are so critical to the U.S economy, the fact that optimism from business owners hit the highest level in 35 years should be very beneficial to the economy during the 2nd half of 2018.
Via NFIB:
“Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase,” said NFIB President and CEO Juanita Duggan.
Investors could not have asked for a better start to the year for company earnings than what they have gotten. With small business optimism hitting records and a long overdue surge in business investment, the table is set for continued strength in the U.S. economy.
Next, we will look ahead to some of the challenges the market could face in the 2nd half. We will tackle the ongoing tariff negotiations currently taking place between China and the United States as well as the decision by the Federal Reserve to hike interest rates once or twice by the end of the year. We will also take a look at which investments have been the leaders and which have been the laggards in the first half of 2018.