Is the US slipping into an earnings recession?

We maintain a positive stance on US equities
Chief Investment Office22 Oct 2019
  • Talks of an impending US earnings recession have been triggered.
  • But a 2015-style earnings recession is unlikely in our view.
  • Back then, the sharp pullback in Energy sector earnings was a major drag – not the case today.
  • Ongoing corporate shares buyback will continue to underpin US earnings momentum.
  • Stay invested in US equities via a thematic approach.
Photo credit: AFP Photo

What happened?
Trade war uncertainties and lingering macro weakness has triggered talks of an impending US earnings recession. Recent deterioration in US macro data, notwithstanding ongoing trade war uncertainties, have dampened investors’ outlooks on US corporate earnings. Indeed, the Institute for Supply Management (ISM) Manufacturing data has fallen from 54.3 at the start of the year to the current level of 47.8, suggesting that the country’s manufacturing activities are in a contractionary mode. The services segment is not spared either – the ISM Non-Manufacturing index moderated from 58.0 to 52.6 during the same period.

Not surprisingly, the recent bout of macro weakness has triggered concerns that an US earnings recession, similar to the one in 2015, is on the cards. We assign a low probability to this.

What does this mean?
2015 vs present: Key differences. Back in 2015, US earnings fell 3.0% from its peak while operating margins also contracted by 1.2%pts – none of which we are seeing today as the contraction in earnings/margins has been benign. From an earnings perspective, the key differences between 2015 and today are:
  • Oil prices: The 2015 earnings recession was mainly due to the sharp pullback in oil prices and by extension, Energy sector earnings. This is not the case today.
  • Share buybacks. Compared to 2015, the volume of shares buyback is higher today and this helps to underpin the sustainability of US earnings momentum.
  • Trade war: The impact of trade wars on US corporate earnings is limited at this juncture given that services account for a significant portion of US revenue, and this segment is not subjected to tariffs.

What should you do?
Stay invested in US equities via a thematic approach. We have maintained a positive stance on US equities and our view remains unchanged. Stay invested in the US market via a thematic approach:
  1. Growth theme: Gain exposure via US Technology, Communication Services (Internet media), Consumer Discretionary (e-Commerce), and Health Care.
  2. Low rates theme: Gain exposure via US Real Estate.
  3. Dividend yield theme: Gain exposure via US Energy.

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