The Buy America trade

Katie Martin (0:06)

Pushkin.

There's really no two ways about it. US companies are absolutely crushing it at the moment. We're well into earning season in the States right now. One of the currently four times of year when listed American companies tell the world how they're doing. And the answer is, very nicely indeed, thanks very much. A good chunk above 80% of companies in the S&P 500 have beaten what were already pretty lofty expectations for the money they're making. And it's not just in AI. Today on the show, heaven knows, it pains me to say it, but it's the Buy America trade. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. Katie Martin, a markets columnist at the FT in London, busily memorizing the entire internet in advance of the FT Alphaville pub quiz tonight.

All the way from over there in the land of bumper earnings, it is the big fella, Mr. Robert Armstrong, who today has been put in a special chair for recording this podcast.

Rob Armstrong (1:16)

It's true.

I'm a bad boy and I move around a lot when I talk. And so our producer Jake has gotten me a chair that doesn't move, so I will sit still. And if this doesn't work, what restraints are coming next is an open question. Like he's going to zip tie my wrists to the arms of the chair. Whatever it takes.

Katie Martin (1:42)

Yeah, whatever it takes. This is the start of the fight back against a very wiggly, exactly, a wiggly Robert Armstrong.

Rob Armstrong (1:51)

At 54 years old, I'm still the wiggly boy at the back of the class. Sit still Armstrong!

Katie Martin (2:00)

We digress. Rob, tell me, what the hell? What the hell? Like, earning season is just like, it's cray cray.

Rob Armstrong (2:09)

I have never seen an earning season like this. Average S&P 500 earnings growth so far is like in the mid 20s percentage range, year over year. If you look at a chart of earnings growth, you were kind of bumbling along at like 10, 11 percent earnings growth the last couple of quarters. And then it just took the absolute elevator this quarter. And it's been amazing.

I'm ashamed I didn't see this dramatic change coming, but there are a couple of fairly commonsensical explanations for this we could go through.

Katie Martin (2:48)

Yeah. But just a little bit more on the scale of this thing. So as you say, mid-twenties percent in the first quarter, year on year.

That's like a lot of earnings growth. It puts us at roughly a four-year high. And one of the weird things about that is that sometimes you see these explosions in corporate earnings growth when you're coming out of a recession or you're coming out of some sort of shock. So like COVID is over and the global economy reopens and hey, corporate America does incredibly well by comparison with the previous quarter or by comparison with the previous year. Now it's just like...

Rob Armstrong (3:25)

We're not in a recovery. It's just happening. I mean, just to put the size of what we're seeing right now in context over the very long term, the average earnings growth rate for the S&P 500 in real inflation adjusted terms is something like seven, seven and a half percent. So we're going along maybe tripling or quadrupling the standard rate of growth this quarter.

It is like an amazing event we're seeing. And it does, it goes a long way to justify the dizzy heights that markets have hit.

Katie Martin (3:59)

Weirdly, it goes pretty much a hundred percent of the way towards justifying the dizzy heights in US stock markets at the moment. So we've talked about this on the pod before, but it is like double weird that you have stock markets like cranking higher, but without what we call multiples going higher. So investors aren't paying more for the same stuff. They're just tracking earnings. They're following fundamentals in corporate earnings.

Rob Armstrong (4:24)

Each dollar of profits costs you the same thing, right? And so there's just more of the process.

Katie Martin (4:30)

So more profits, so line go up. So this is like, you know, it's very unusual for markets to trade on fundamentals. Like normally they trade on like, you know, hope and expectations and hype and vibes and all this sort of thing. That's actually like not what's happening in the states at the moment. So this is quite, it really is quite extraordinary. So look, AI is a big part of it. Let's talk about like, you know, there's tech companies that are making money hand over fist. Fine. I think we kind of expect that's going to be a thing, right?