President Donald Trump’s protectionist saber-rattling has led to multi-front trade skirmishes with America’s major trading partners. Now Trump threatens to up the tit-for-tat ante with an incremental 10% tariff on $200 billion of Chinese imports. He did so Monday evening. The Chinese immediately said that they would retaliate in kind.
This may all be Trump’s art of the deal-making. However, bullying the Chinese in public rather than negotiating with them in private is risky. The longer that the noisy dispute continues, the more it could harm global economic growth as businesses postpone spending until the smoke clears. The biggest risk, of course, is that the smoke is actually the fog of war. Trump’s approach risks escalating the trade skirmishes into an all-out trade war, which would depress global economic activity. Now let’s try to tune out the noise of war and find some peace and quiet:
(1) Forward earnings. Notwithstanding all of the above, I continue to focus on the strong signal coming from S&P 500/400/S&P 600 forward earnings. All three rose to record highs in mid-June. The forward earnings of the S&P 500 is up to $168.40 per share, quickly approaching my target of $170 for the end of this year. Barring an all-out trade war, that level seems easily achievable, since forward earnings will equal the consensus expectation for 2019 by the end of this year. That expectation has been rising ever since the cut in the corporate tax rate at the end of last year. It was $176.94 in mid-June. (For a thorough explanation of forward earnings, see Chapter 13 on "Predicting Corporate Earnings" in my new book Predicting the Markets.)
(2) Forward revenues. I guess that industry analysts haven’t gotten the trade-war memo yet. Their forward revenues estimates for the S&P 500/400/600 continued to climb to fresh record highs in mid-June. The upward slope is particularly steep for both the forward revenues and forward earnings of the S&P 600 SmallCaps.
(3) Profit margins. The S&P 500 forward profit margin continues to rise in record-high territory. It was 12.2% in mid-June, up from 11.1% during the December 14 week, just before Trump’s tax cut.
(4) Bottom line. My bottom line is that the noise hasn’t drowned out the signal, which remains strong enough so that stocks have held up quite well despite the noise of war. I expect that investors will tune out the noise and focus on the signal over the rest of the year.
