U.S. Equities Just May Fend Off a Profit Recession

Halfway through second-quarter earnings reports, it looks like the much-ballyhooed fear of U.S. equities experiencing a profit recession could be subsiding. According to Bob Pisani of CNBC, things are looking relatively static when compared to previous quarters—a sign that a profit recession was little more than smoke and mirrors. 

76 percent of companies that have reported second-quarter earnings thus far have beaten Wall Street expectations, which falls in line with the last four quarters. Additionally, earnings guidance for the second half of 2019 is reflecting the status quo and no major market downturns ahead with respect to profit declines. 

Earnings guidance for the second half of the year is not collapsing as some feared they might,” wrote Pisani. The slower global economy, and the related tariff and trade war, is proving a drag on many corporations that get significant revenues overseas, but earnings guidance overall for the second half is not collapsing and can best be described as ‘flattish.’” 

In the meantime, the Federal Reserve is expected to cut interest rates by 25 basis points, which could help stymie fears of a global economic slowdown. This, in turn, will cause other central banks around the world to follow vis-à-vis the United States’ penchant for being the “leader” in a game of follow the leader. 

Still, Pisani cited warning signals investors should take note of: inflated stock prices and the effect of trade wars on the global economy. Nonetheless, for investors erring on the side of bullishness when it comes to U.S. equities, there is a relative weight exchange-traded fund (ETF) to consider. 

for investors sensing continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

With investment firms expecting no-frills earnings expectations for the rest of 2019, that’s a lot better to the investor’s ear than the “R” word. 

That is a great comfort to bulls, who were fearful of a cascade of downward earnings revisions from multinational companies under assault by trade wars and slower global growth would lead to a dramatic earnings ‘recession,’” Pisani wrote. 

The majority of the capital market is looking for an interest rate cut by the Federal Reserve to propel the major U.S. indexes, but a sluggish showing in second-quarter earnings could mean that U.S. equities could be overvalued. Would a less-than-stellar second-quarter earnings showing put international equities over U.S. equities?

For investors looking to play the international equities over U.S. equities angle, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) gives investors the opportunity to capitalize on this hunch. RWIU seeks investment results, before fees and expenses, that track the FTSE All-World ex US/Russell 1000 150/50 Net Spread Index. The FTSE All-World ex US/Russell 1000® 150/50 Net Spread Index (R1AWXUNC) measures the performance of a portfolio that has 150 percent long exposure to the FTSE All-World ex US Index and 50 percent short exposure to the Russell 1000® Index.

For more relative market trends, visit our Relative Value Channel.