Money Advice

Stocks ignore tough trade talk, focus on earnings instead

Posted by The Simply Money Advisors Team on Jul 23, 2018 12:59:58 PM

Stocks were steady last week despite the increasingly tough trade talk from President Trump, who threatened to slap tariffs (taxes) on all $505 billion of China’s imported goods.

China did not respond to this latest threat, but the country has taken measures to lessen the effect that tariffs will have by weakening its currency. By depreciating the yuan, its exports will appear less expensive to consumers from other countries. This will somewhat offset the impact of tariffs, which make its products appear more expensive.

Earlier in the week, Federal Reserve Chair Jerome Powell testified before Congress, stating the Federal Reserve (Fed) will raise short-term interest rates at gradual pace "for now." The reason for this measured approach is because he's not too concerned about inflation.

According to Bloomberg, the markets are pricing in a 78% chance for an interest rate hike in September. On Thursday and Friday, President Trump went to Twitter to say the Fed should not be raising interest rates so quickly because it’s not good for the economy. Presidents have historically not discussed Fed policy because the Fed is an independent agency.

One of the reasons markets have been relatively calm in spite of President Trump’s tariff threats is that second quarter earnings reports from corporations are off to a great start. Of the 86 large companies reporting earnings so far, 94% have beaten analysts’ earnings estimates and 78% have reported better-than-expected sales.

Compared to the same time last year, on average, earnings are 23% higher and sales growth is 10%. There are 171 large companies reporting earnings this week, including Alphabet (formerly Google), Verizon, AT&T, Boeing, Facebook, Ford, McDonald’s, Amazon.

The economic calendar this week is highlighted by the report card for the U.S. economy – the Gross Domestic Product (GDP) report. Economists currently expect growth to have rebounded from 2% in the first quarter to 4.3% in the second quarter (though that 4.3% estimate may change the closer we get to the report on Friday). Growth has been driven by strong spending by you, the consumer, which makes up about 70% of the U.S. economy.

Other important economic releases include reports on housing (existing home sales and new home sales) and manufacturing (durable goods new orders).

The Simply Money Point

Markets are currently not being as impacted by trade war talk as they had been in prior months. A growing economy and strong corporate earnings are the positive factors offsetting trade war fears.

Topics: Economy

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