Time for Investors to Grab the Rebound

Firmer global growth and a pickup in inflation are beginning to push earnings higher

By Justin Lahart

Flagging global growth, punk pricing and declining earnings have been a feature of the corporate landscape lately. That may be changing, though, and investors had better be ready for it.

This year will go down as one many U.S. companies would like to forget. The combination of weak overseas economies and dollar strength has cut into their performance abroad.

Domestically they have done better, but the economy is hardly growing like gangbusters.

Meanwhile, low inflation has made it hard to raise prices without losing sales.

Lately, however, things are looking up. For companies, this makes for happier times. For investors it is time to change tactics.

Business appears to be picking up world-wide. A composite index of global manufacturing activity produced by J.P. Morgan Chase and IHS Markit rose to 51 last month, its highest level of the year. A reading of 50 is the dividing line between expansion and contraction. Global gross domestic product, while slow, looks to have posted its strongest growth in over a year in the third quarter.

The pickup is getting mirrored in the U.S. Economists think this Friday’s report from the Commerce Department will show GDP grew at a 2.5% annual rate in the third quarter, the fastest pace since the second quarter of 2015.

The rise in oil and raw-materials prices has begun pushing inflation higher globally.

Additionally, the effect of past dollar strength on American import prices is beginning to fade.

Economists at J.P. Morgan Chase estimate that consumer prices will increase at a 4% annual rate in the fourth quarter, their largest gain since 2011.

Better growth and better prices, along with less dollar drag, make for better earnings. Indeed, with results for 116 of the companies in the S&P 500 already in, Thomson Reuters I/B/E/S estimates third-quarter earnings for the index are up 1.1% from a year earlier—the first gain since the second quarter of last year. Under generally accepted accounted principles—that is, without the items companies often exclude from their advertised results—S&P Dow Jones Indices estimates earnings will be up 16%.

For investors, periods of better growth, rising inflation and expanding earnings typically favor shares of companies like retailers and capital-equipment makers that are able to generate stronger profit gains in flush times than stable growers like utilities. Meanwhile bonds, which investors have been pouring money into this year, don’t do well at all.

Investors who don’t pivot now may end up feeling rather deflated.

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