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Prospects for Second-Half Rebound in Global Economic Growth, Corporate Earnings Diminishing

Confidence in current, future business conditions weighs on spending, investment plans

With nearly two months of the third quarter complete once August ends, more economic indicators are flashing hints of recessionary signals, putting an increasing number of market participants on notice that the global economy may not be picking up soon.

The lingering and unsolved trade dispute between the U.S. and China, continued slowdown in manufacturing as evidenced by purchasing managers surveys in G7 countries, Brexit, the 2020 Presidential election and other factors are impacting business sentiment and plans for capital spending.

In the U.S., the waning benefits of tax cuts, the trade war and the inversion of the Treasury yield curve are among the worries about the economy’s health. A yield curve inversion is seen as a leading indicator of a recession, something which Benjamin Bimson, Trek’s chief investment officer, took a look at in this August 27 Trek Insights piece.

With more signs of a slowdown, expectations for corporate earnings in the U.S. are also dimming. Second quarter earnings for companies in the S&P 500, on a blended basis, were at a decline of 0.7% based on 90% of companies actual results, as of August 9, according to FactSet Research Systems Inc.1 Aggregated earnings, then, are on pace for back-to-back quarterly declines for the first time since 2016.

For the full year, analysts were projecting earnings growth for companies in the S&P 500 of 1.5%, according to FactSet’s report, cited above. That is down from projections of nearly 7.5% growth at the beginning of the year, according to FactSet.2

Also on the earnings front, all doesn’t appear as well as once thought. In mid-August, the Bureau of Economic Analysis made multi-year revisions to the National Income and Products Account (NIPA) measure of corporate profits, which covers all public and private companies.

The nearly $200 billion downward revision was concentrated in the past three years, due to upward revisions to corporations’ unit labor costs and interest payments on debt, according to Liz Ann Sonders, senior vice president and chief investment strategist at Charles Schwab & Co.

“Those revisions mean the latest five-year trend in the broadest measure of corporate profits is now flat vs. upward sloping prior to the revisions,” she said in an August 12 market commentary.3

With the hoped for spike in capital spending following the tax cuts somewhat offset by the trade war, business sentiment has fallen. “We’ve obviously seen the indirect hit to business (and to a lesser degree consumer) confidence from the trade war. But this dented confidence has had a direct impact on capital spending intentions, which have plunged,” Sonders said in an August 26 market commentary, following up on several themes from two-weeks prior.4

A recent monthly survey found that confidence among chief executive officers (CEOs) in future business conditions fell to its lowest level since October 2016, according to Chief Executive’s CEO Confidence Index.5 Confidence in current conditions also fell with August’s announcements of more tariffs from U.S. and Chinese officials.

Sixty-two percent of CEOs surveyed (August’s poll had 258 responses) told Chief Executive that the trade war is becoming highly detrimental to their outlook and strategy. A growing theme is expectations that companies will pull back on hiring and investing. Sales and earnings forecasts are also down.

Fewer than 50% of CEOs were forecasting an increase in capital expenditures or headcount over the next 12 months. In addition, only 69% anticipated an increase in revenues, which Chief Executive reported as a low not seen since September 2016. Only 61% expected profits to rise, a three-percentage point decline in August alone.

Concern is growing, too, about the potential knock-on effects of higher tariffs on consumer spending.

“So far, companies have been willing to eat those costs and not pass them on to the consumer, which has kept the consumer very active,” Stephen Foley, head of corporate banking at TD Bank, told Chief Executive. “But the more this hits the consumer, I think we should begin to worry.”


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1-Butters, J. (2019, August 9.) Earnings Insight. FactSet Research Systems Inc. Retrieved from:

2-Butters, J. (2019, January 4.) Earnings Insight. FactSet Research Systems Inc. Retrieved from:

3-Sonders, L. (2019, August 26.) War (What is it Good For?). Charles Schwab & Co., Inc. Retrieved from:

4-Sonders, L. (2019, August 12.) Recession Watch (or Distant Early Warning?). Charles Schwab & Co., Inc. Retrieved from:

5-Nolen, M. (2019, August 19). CEO Confidence Plunges In August Amid Growing Trade Worries And Slowdown Fears. Retrieved from:


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