With the United States and China finally formalising tit-for-tat import tariffs, Wall Street is gearing up to dissect U.S. corporate earnings in the coming weeks for signs of a trade war impact and whether it will affect spending plans.
Investors worry the trade conflict with China, the U.S.’s largest trading partner, could make companies delay plans for capital expenditures, which jumped in the first quarter after the late December tax overhaul that included massive corporate tax cuts.
The U.S. and China slapped duties on $34 billion worth of each others’ imports on Friday, escalating their conflict and suggesting there was little sign the dispute will soon end.
Machinery, aerospace and other industrial names have been among the hardest hit. S&P 500 industrials have fallen more than 5% since March 1, when U.S. President Donald Trump said he would impose steep tariffs on steel and aluminum, while the S&P 500 has risen more than 1% in that period.
Following the tax package approval, expectations were high that companies would ramp up not just buybacks and dividends but capital spending in 2018, said Quincy Krosby, chief market strategist at Prudential Financial.
“What we’re hearing from a number of CFOs is if the trade issue continues to dominate the headlines and create even more uncertainty, those plans may be on hold,” she said.
‘Planning headache’
In the first quarter, year-over-year S&P 500 capital expenditure growth was the highest since 2011, according to S&P Dow Jones data. Strategists at DataTrek Research said in a recent note the “primary planning headache” for corporate managers in the second half of the year will come from uncertainty related to trade and tariffs.
“The major concern is the supply chain. So many little parts for almost everything are manufactured in China, and there can be a real hold-up in manufacturing because of these tariffs... It is all a balancing act,” said Tim Ghriskey, chief investment strategist at Inverness Counsel. “For every company hurt, there’s a company that’s being helped. So this isn’t negative for everyone by any means.”
Reporting on the second quarter kicks into gear this week, with results from JPMorgan Chase, Wells Fargo and Citigroup. More than 200 S&P 500 reports are due the following two weeks, including from some U.S. firms that could be caught in the middle of a U.S. trade war with China.
They are expected to include results from Honeywell, Boeing, Whirlpool and Western Digital, while results from Caterpillar are due July 30. Profit forecasts that include a potential tariff impact will perhaps even overshadow second-quarter earnings growth, which analysts say could equal or surpass the first-quarter’s 26.6% year-over-year increase. That was the biggest since the fourth quarter of 2010, according to Thomson Reuters data.
