US Earnings Growth: A Bright Future or a Temporary Upswing?

CEO Confidence on the Rise

Following Nvidia's impressive earnings report this Wednesday, a surge in CEO confidence seems to suggest a forthcoming rise in US earnings growth. However, the duration of this growth is contingent on the remaining lifespan of the economic cycle.

With the announcement of an impending UK election, the 1990s pop-synth hit "Things Can Only Get Better" by D Ream has become a symbolic anthem. Drawing parallels, US CEOs, buoyed by rising confidence, seem to be dancing to the same tune. Historically, a rise in CEO confidence has often preceded a boost in earnings.

Flat EPS Growth May See a Rise

Despite the flat growth of EPS (Earnings Per Share) for the S&P 500, the surge in CEO confidence could signal an imminent rise. This is further supported by the tendency for stock buybacks to increase when CEOs are optimistic, effectively reducing the share count and providing an additional boost to EPS.

While companies like Nvidia began to show an uptick in earnings last summer, a broader earnings increase is expected to follow suit. Given the inherent lags in economic relationships, the re-acceleration in the cycle about six-to-nine months ago should start to impact more broadly around now.

Future Earnings Growth: A Question of Duration

An increase in earnings growth seems inevitable. However, the duration of this growth remains uncertain. The new orders-to-inventory ratio in the ISM (Institute for Supply Management), a measure of whether purchasing managers expect to accumulate inventory or need to increase production to meet orders, has been declining and has dipped below one.

If this trend continues, it could indicate that earnings may fall short of expectations by early next year. The ISM ratio, which leads the difference between EPS and forward EPS one year ago by about nine months, supports this prediction.

Although the near-term risk of a recession remains low for now, the situation could change rapidly. This suggests that while earnings growth may see an improvement in the coming months, it may not be a long-term trend.

What's Your Take?

What do you think about this optimistic outlook for US earnings growth? Is it a temporary upswing or a sign of sustained growth? Share your thoughts and discuss this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.