July 11, 2018 glacierinvest

Interesting chart from Credit Suisse via the WSJ’s Daily Shot looking at annual EPS revisions this year versus the historical trend.

Clearly tax benefits have contributed to the revisions but stronger fundamentals are also contributing, both of which are encouraging. The stock market has been bouncing around the past several weeks as investors attempt to digest the positive (earnings and fundamentals) and the negative (tariffs). Focusing on earnings and multiples, things look pretty good although it would appear we are in the latter stages of the cycle.

However, once we take into account externalities (i.e., tariffs), the big picture gets a lot murkier and uncertain. We noted in yesterday’s post the need to avoid being hasty in our assessments of the impact of tariffs on prices. We were fairly myopic in our assessment as we failed to acknowledge the impact on businesses and their employees as well as the broader economy. It’s very likely we won’t really get a sense of the impact of tariffs on earnings and the broader economy for another few months. Management teams will surely address the expected impact of tariffs on their businesses but it may be that they don’t fully know the extent of the impact yet, which was the intent of my post yesterday. Before we overreact and give in to alarming headlines, let’s make sure we have as firm of an understanding as possible, which leads me to my final point today. Markets not only can overshoot to the upside but they can also over-correct on the downside, which I fear may happen here.