INVESTORS TUNE IN FOR TRADE IMPACT
Analysts mixed over how much influence US-China trade war will have on companies’ bottom lines
WITH the United States and China finally formalising tit-for-tat import tariffs, Wall Street is gearing up to dissect US corporate earnings in the coming weeks for signs of a trade war impact and whether it will affect spending plans.
Investors worry the trade conflict with China, the US’ largest trading partner, could make companies delay plans for capital expenditures, which jumped in the first quarter after the late December US tax overhaul that included massive tax cuts for corporations.
The US and China slapped duties on US$34 billion (RM137 billion) worth of each others’ imports on Friday, escalating their conflict and suggesting there was little sign the dispute will soon end.
Machinery, aerospace and other industrial names have been among the hardest hit. S&P 500 industrials have fallen more than five per cent since March 1, when US President Donald Trump said he would impose steep tariffs on steel and aluminium, while the S&P 500 has risen more than one per cent in that period.
Following the tax package approval, expectations were high that companies would ramp up not just buybacks and dividends but capital spending this year, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
“What we’re hearing from a number of chief financial officers is if the trade issue continues to dominate the headlines and create even more uncertainty, those plans may be on hold,” she said.
In the first quarter, year-overyear S&P 500 capital expenditure growth was the highest since 2011, according to S&P Dow Jones data.
Strategists at DataTrek Research here said in a recent note the “primary planning headache” for corporate managers in the second half of the year will come from uncertainty related to trade and tariffs.
“The major concern is the supply chain. So many little parts for almost everything are manufactured in China, and there can be a real hold-up in manufacturing because of these tariffs. It is all a balancing act,” said Tim Ghriskey, chief investment strategist at Inverness Counsel.
Reporting on the second quarter kicks into gear this week, with results on Friday from JPMorgan Chase, Wells Fargo and Citigroup. More than 200 S&P 500 reports are due the following two weeks, including from some US companies that could be caught in the middle of a US trade war with China.
They are expected to include results from Honeywell, Boeing, Whirlpool and Western Digital, while results from Caterpillar are due July 30.
Profit forecasts that include a potential tariff impact will perhaps even overshadow secondquarter earnings growth, which analysts say could equal or surpass the first quarter’s 26.6 per cent year-over-year increase. That was the biggest since the fourth quarter of 2010, according to Thomson Reuters data.
Though consumer discretionary shares have been among the best performers this year, UBS analysts said import tariffs could be a worry for the retail industry.
Harley Davidson drew attention last month when it warned of a financial toll from trade tensions, and the trade dispute in general has created uncertainty for investors struggling to value stocks at a time strong corporate profits might otherwise help carry the bull market through its 10th year.
Some investors say much of the negative news has already been priced into the market, suggesting stocks could gain as earnings are reported.
The tariff impact has yet to show up in earnings forecasts, even though trade tensions were a worry heading into first-quarter results as well.
Estimates for S&P 500 secondquarter profit growth actually have risen slightly since April, putting the latest forecast at around 20.7 per cent, based on Thomson Reuters data.
Given that the majority of companies typically beat analysts’ earnings expectations, that number is likely to rise.
But other risks to earnings are mounting as well, including rising interest rates and a strengthening dollar, which strategists say could be more of a problem in the second half of the year if it continues on the same path.
Higher commodity and labour costs are on the list of profit worries as well.