Private Client Group

September 1st, 2018

Corporate Earnings vs. Tariffs – Which Will Win Out?

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As we enter a holiday weekend, good news seems to be a common theme with corporate profit earnings soaring and the GDP estimate for Q2 stronger than expected. Read on to get all the details…

Corporate Profits Soaring — the Commerce Department published its latest measure of corporate profits in the second quarter, and the results were as solid – or even more solid – than most anticipated. The Commerce Department’s broadest measure of after-tax earnings across the U.S. jumped +16.1% in Q2 from a year earlier, which marks the biggest year-over-year increase in six years. Economic growth momentum contributed to the gains, which could easily be tied to impact felt from the massive cut in corporate taxes at the turn of the year – companies paid 33% less than a year earlier. That being said, investors should bear in mind that the strong tailwinds of tax cuts are arguably transitory in nature, meaning we could see the short-term boost fizzle off in the coming quarters.1

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Can the Positives Outweigh the Negatives in the Marketplace?

Want to learn more about the ever-changing market landscape, look no further than our Just-Released Market Strategy Report. This report will give you an inside look into key economic factors.

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GDP Figures Revised Higher – in another bout of good news this week, the Bureau of Economic Analysis revised their estimate for second quarter GDP higher, to a rate of 4.2%. That was stronger than the advance estimate given a few weeks ago of +4.1%, indicating that even with further revisions we can reasonably expect the strong growth rate to stick. In the first quarter, real GDP increased 2.2%. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $72.4 billion in the second quarter, compared with an increase of $26.7 billion in the first quarter.3

Nearing a NAFTA Deal – details of a new deal reached with Mexico emerged this week. Among them a requirement that car companies manufacture at least 75% of an automobile’s value in North America, up from the current 62.5%, and also a requirement that a set amount of auto components be made by workers earning at least $16 an hour. Critics argue that these new terms create a form of ‘managed trade,’ whereby governments and rules dictate how cars should be made, down to wage levels. In a sense, a tilt away from free trade and free market economics. Perhaps the biggest feature of the proposed deal, however, was the absence of Canada. The Trump administration signaled its willingness to move forward without Canada if a deal could not be reached by Friday, though gaining such approval from the U.S. Congress will likely face uphill battles.4

Farm Bailout – in one of the more visible fallouts from the ongoing global trade disputes, the U.S. agriculture industry is feeling the impact of retaliatory tariffs, particularly on soybeans. In response to the losses, the Trump administration is prepared to launch an emergency agriculture plan worth about $6 billion in aid for farmers, to begin after Labor Day. There is a bit of irony in bailing out an industry due to tariffs that were supposed to help American enterprises, and some farm groups are even warning that the additional government spending won’t make up for losses from trade clashes.5

Want to learn more about the ever-changing market landscape, look no further than our Just-Released Market Strategy Report.6 This report will give you an inside look into key economic factors.

If you have $500,000 or more to invest and want to learn more, click on the link below to get your free report today!

Disclosure

1 The Wall Street Journal, August 29, 2018, https://www.wsj.com/articles/u-s-corporate-profits-soared-in-second-quarter-boosted-by-tax-cuts-and-economic-growth-1535559230

2 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion

3 BEA, August 29, 2018, https://www.bea.gov/news/2018/gross-domestic-product-second-quarter-2018-second-estimate-corporate-profits-second

4 The New York Times, August 27, 2018, https://www.nytimes.com/2018/08/27/us/politics/us-mexico-nafta-deal.html

5 CNBC, August 27, 2018, https://www.cnbc.com/2018/08/27/trump-farm-bailout-to-provide-6-billion-dollars-in-initial-relief.html

6 Zacks Investment Management reserves the right to amend the terms or rescind the free Market Strategy Report offer at any time and for any reason at its discretion

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

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