Q1 earnings are weak as manufacturing keeps growing slowly


The earlier posts have documented quite clearly the economy was slowing down. GDP for Q1 came in exactly as we have anticipated thanks to the superb model GDPNow of the Atlanta Fed.

The press keeps telling us the economy is going to strengthen. They may be right. The latest data on manufacturing, however, still reflect a struggling economy. (See above chart. Click to enlarge it).

The red line shows the purchasing managers composite index at 51.5 (blue line). The more reliable and less volatile delivery index was 50.1 in April (red line). Employment has contracted according to the same report.

The bottom line is the economy is still languishing and growing slowly. Business is not showing yet the rebound due to the supposedly bad weather of Q1.

Why do we care? Because the business cycle is alive and well. A weaker economy implies slower sales and causes commodities and profits to slow down.

The following comments are from Zacks  report on Q1 earnings.

"We now have Q1 results from 344 S&P 500 members that combined account for 76% of the index’s total market capitalization.

Total earnings for these 344 companies are up +5.9% from the period last year, with 66.1% beating earnings estimates.

Total revenues for these companies are down -3.5% from the same period last year, with only 38.8% beating top-line estimates.

The earnings growth rate (+5.9%) is decent enough, but is weaker relative to other recent periods.

Total revenues for these companies are down -3.5% from the same period last year, with only 38.8% beating top-line estimates.

This is weak performance compared to what we have seen from the same group of companies in other recent quarters".

What is worrying us is weak earnings will eventually convince investors that, as far as equity prices are concerned, growth in earning is more important than the liquidity effect created by the Fed .

Time will tell, of course.

More details on how these ideas apply to portfolio management are found in The Peter Dag Portfolio on www.peterdag.com
George Dagnino, PhD
The Peter Dag Portfolio
Since 1977
Author, Profiting in Bull and Bear Markets
No. 1 bond timer in the past 12 months. 

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