Corporate earnings in the USA have plateaued in recent quarters, in line with the macroeconomic scenario. EPS figures across the board are slightly lower in 2016 than they were in 2015.
A number of macroeconomic factors are behind the soft earnings cycle in the past few months:
a tight job market, which pushes up the wages paid by companies,
productivity that continues to decline, and
lower potential GDP growth since the financial crisis, at only 2%, versus 3% between 1990 and 2007. The impact of this lower growth level is clearly reflected in sales and earnings figures. Historically, aggregate corporate earnings tend to track GDP growth.
Preliminary indications that the job market is saturated suggest a late-cycle economy in the USA. But corporate earnings growth could find support over the next few quarters in GDP growth, which we forecast at 1.9% for 2016 and 2.2% for 2017 (bracketing the potential growth level of 2%). We expect economic activity to be fuelled by the property sector and solid consumer spending. But even if earnings remain firm, capital spending and wage increases will be contained – companies are focusing at this point on paying out a dividend and buying back their own shares.