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US Corporate Earnings Suggest US Economy Is in Decent Shape

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Solid corporate earnings have boosted major indexes

Major US indexes are currently hovering near all-time highs. The most recent rally comes after better-than-expected US corporate earnings. During the back end of last year, all indexes including the tech-heavy Nasdaq Composite Index slumped. Investors were increasingly worried about the state of the economy with many predicting that a recession was near.

This caused analysts to temper their estimates for both the economy and US earnings. Earnings estimates were beaten down even more after several companies warned that their earnings would be worse than expected. However, at least during the first half of the year, both the economy and corporate earnings have performed much better than many had expected.

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The Invesco QQQ Trust (QQQ), which tracks the Nasdaq Composite Index, has surged 26.7% this year, and 13.9% since the start of June. Tech stocks have continued to outperform broader markets this year, despite several headwinds. The Nasdaq Composite Index currently sits at 8,233, slightly below the all-time high of 8,340 it recently reached.

US earnings have generally been better than expected

According to FactSet, 44% of S&P 500 companies have reported earnings as of July 26, and 170 of them have delivered better-than-expected earnings. According to FactSet, the earnings of the S&P 500 companies that have reported earnings so far have risen 0.7% on an average from the same quarter last year.

Several major tech companies have reported good numbers. Most of the FAANG companies that have reported earnings have seen their revenue growth accelerate during the second quarter. Internet companies like Facebook, Snapchat, Twitter, and Google delivered blockbuster reports. These companies continue to perform well despite increasing regulatory actions by the authorities

The US economy is on solid footing but could slow down further

Meanwhile, the US Bureau of Economic Analysis released the advance estimates for the GDP growth during the second quarter for the US last week. The US economy grew 2.1% on an annualized quarter-over-quarter basis, beating analysts’ estimates of 1.8%.

This represented a slowdown from the first quarter when the economy grew by a solid 3.1%. However, it just goes to show that the economy is doing better than most people expected in late 2018. That said, the economic growth might continue to slow down in the coming quarters, as some forward-looking data suggests.

Better-than-expected earnings have taken the focus away from lingering fears like high valuations, a slowing global economy, and the US-China trade war. However, these worries have not dissipated. As the earnings season settles down, markets might turn their focus back on these worries.

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