Chapter 1: What are the current earnings trends for US companies?
Pushkin.
There's really no two ways about it. US companies are absolutely crushing it at the moment. We're well into earnings season in the States right now, one of the currently four times of year when listed American companies tell the world how they're doing. And the answer is, very nicely indeed. Thanks very much.
A good chunk above 80% of companies in the S&P 500 have beaten what were already pretty lofty expectations for the money they're making. And it's not just in AI. Today on the show, heaven knows, it pains me to say it, but it's the Buy America trade. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.
I'm Katie Martin, a markets columnist at the FT in London, busily memorising the entire internet in advance of the FT Alphaville pub quiz tonight. All the way from over there in the land of bumper earnings, it is the big fella, Mr. Robert Armstrong, who today has been put in a special chair for recording this podcast.
It's true. I'm a bad boy and I move around a lot when I talk. And so our producer, Jake, has gotten me a chair that doesn't move so I will sit still. And if this doesn't work, what restraints are coming next is an open question. Like he's going to zip tie my wrists to the arms of the chair. Whatever it takes.
Yeah, whatever it takes. This is the start of the fight back against a very wiggly, wriggly Robert Armstrong.
It's true. At 54 years old, I'm still the wiggly boy at the back of the class.
Sit still Armstrong! We digress. Rob, tell me, what the hell? What the hell? Like, earnings season is just like... I've never... It's cray cray.
I have never seen an earnings season like this. Average S&P 500 earnings growth so far is... And it's been amazing. I'm ashamed I didn't see this dramatic change coming, but there are a couple of fairly commonsensical explanations for this we could go through.
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Chapter 2: How could the Middle East conflict impact US markets?
It's just happening. I mean, just to put the size of what we're seeing right now in context, over the very long term, the average earnings growth rate for the S&P 500... in real inflation-adjusted terms, is something like 7%, 7.5%. So we're going along maybe tripling or quadrupling the standard rate of growth this quarter. It is like an amazing event we're seeing.
And it goes a long way to justify the dizzy heights that markets have hit.
weirdly, it goes pretty much 100% of the way towards justifying the dizzy heights in US stock markets at the moment. So we've talked about this on the pod before, but it is like double weird that you have stock markets like cranking higher, but without what we call multiples going higher. So investors aren't paying more for the same stuff. They're just tracking earnings.
They're following fundamentals in corporate earnings.
Each dollar of profits costs you the same thing, right? And so there's just more of the profits.
So more profits, so line go up. So this is like... You know, it's very unusual for markets to trade on fundamentals. Like normally they trade on like, you know, hope and expectations and hype and vibes and all this sort of thing. Yes. That's actually like not what's happening in the States at the moment. So this is quite, it really is quite extraordinary. So look, AI is a big part of it.
Let's talk about like, you know, there's tech companies that are making money hand over fist. Fine. I think we kind of expect that's going to be a thing, right?
But there's also one of the sectors that's growing earnings at a very lively pace this quarter is industrials. Like these metal banging, real world living in heavy metal kind of companies are doing great. And part of that, I wrote about this in the newsletter last week, is there's a handful of them working.
where they're just building data centers and they're like putting in the air conditioners for the data centers and throwing the wires in the ground and putting the building up and et cetera, et cetera. So there is a handful of industrial stocks that have just gone bananas because literally they are beyond their capacity to serve the construction needs of the data center.
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Chapter 3: What sectors are driving earnings growth in the US?
There's all these worries about certain software companies will get murdered by AI and et cetera, et cetera. But the basic background in demand for digital services is very strong.
Let's spend a little while on a phrase I'm told that I use too often, which is fun sponges. So there are people out there who are like, I just can't bring myself to believe that everything is as rosy as it looks. One organization out there that's saying that is Hussman Global Advisors, I think is their full name.
They are in the fun sponge business and have always been.
They are in the business of soaking up fun and are pretty reliably kind of Debbie Downers about market direction. But as they pointed out in a little note they did the other day, it is weird to have this level of earnings growth when you're not coming out the other side of some sort of recession or shock. That is legitimately actually quite weird. Yes.
And also, it sort of assumes that AI won't come and kill certain sections of the stock market. So when you've got like a decent spread of companies that are doing well, no one's pricing in this possibility that AI could end up chewing them up. So they're kind of reasonable-ish pushbacks, I think. But you just can't fight the direction.
It's true. And so the issue you just raised is the issue of sustainability. You know, there is a case to be made that this is a bit of a sugar rush, that all this stuff can't go on forever. You know, the oil companies are an example of this, right?
Not so much in the first quarter, but in terms of what they're talking about, how it's going now in the second quarter, there's a shortage of the stuff that they make. They're going to print it, right? But one day, as the guy in Apocalypse Now says, this war is going to end, at which point oil prices are going to go down, right? So that's a temporary phenomenon.
And I guess if you wanted to be a Debbie Downer about the United States in particular, you might say... The consumer is not quite what the consumer used to be. So we saw that in the first quarter GDP report that the rate of growth of consumption is slowing. It's gently kind of returning towards trend.
And in the other scenario in which the war doesn't end and oil prices go up, that's likely to get worse. I think, by the way, the U.S. consumer is doing fine right now. McDonald's earnings, just to grab a consumer company out of the air, were fine. They saw, you know, real terms sales growth in the United States.
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