Earnings season for companies in the TSP is fully underway, as businesses large and small report their results for the second quarter of this year.
Overall, the results are very strong at this point. The New York Times reports that 87% of companies that have reported so far have exceeded analyst estimates. The combination of tax cuts to boost net profit margins, record numbers of share repurchases to boost earnings per share, and an economy that continues to hum along nicely has been a very good environment for corporate performance.
Microsoft, currently the second largest holding in the C Fund (accounting for over 3% of the 500-company fund), reported particularly strong results thanks to strong growth of its Azure cloud platform:
Train company and C Fund component CSX reported strong results as well, and shares soared by over 7% on the news. Morgan Stanley, Capital One, and some other large financial institutions in the C Fund also reported strong results. American Express reported decent results.
I particularly like to focus on the results of credit card companies, because in addition to providing a look into the health of the company, their results provide insight into the health of American consumers. And the biggest takeaway so far is that credit card charge-off rates remain at healthy levels, meaning that not too many people are defaulting on their debts.
Despite all of this, the S&P 500 and the C Fund that tracks it has been relatively flat this week:
The S Fund and I Fund have had similar relatively flat performance.
Historically high equity valuations, rising interest rates, and investor concerns over tariff wars have provided downward pressure on stock prices, while good corporate earnings and good economic news continued to support high stock prices, resulting in a standstill this week.
There was one notable piece of negative news, however. The data for housing starts came in worse than expected, continuing a three-month decline and hitting the lowest point in the last nine months. Higher material costs and less housing demand are weighing negatively on the homebuilding industry.
It’s an important metric to take note of, because the number of housing starts is a leading recession indicator.
Jerome Powell’s Bullish Testimony
Fed Chairman Jerome Powell gave his bi-annual testimony to Congress last week, with a largely upbeat message. He views employment as strong, inflation at healthy levels, and an economy that continues to have a good outlook. He also stated he continues to expect gradual interest rate hikes from the Federal Reserve.
His only concern was that higher tariffs may eventually impact the economy:
“If it results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too.”
Gold prices fell to a 16-month low after Powell’s mostly upbeat report and his continued resolve towards interest rate increases, and stock markets responded moderately favorably in the hours during and after the testimony.