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Are investors ignoring a key driver of long-term stock performance?

Gena Binkley

Stocks have held up well despite stalled corporate earnings this year. Are investors ignoring one of the most important drivers of long-term stock performance, or is the market pricing in a return to profit growth soon?

“It’s a little worrisome in that this is the third time global profits have peaked out, they did in 2008, they did in 2011, and it took three years each time for them to recover. We don’t have 3 years this time,” said Jeffrey Kleintop, Chief Global Investment Strategist for Charles Schwab. “Valuations are too high to support that for that period of time.”

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What’s different this time around are the reasons behind the decline in earnings. Corporations cited the change in currency values, severe weather, and the port strike on the West Coast for the drop in first-quarter earnings. “Unlike in the past where we saw earnings declines,” said Kleintop, when corporations explained their drop in earnings on longer-term factors, such as “inventory backing up, or a falloff in demand, or turmoil in the credit markets, those weren’t the drivers this time. I think they’re a little bit more transitory.”

The market will get more information on the economic strength, or weakness, of the first quarter on Friday. Revised first-quarter GDP figures are expected to show that instead of growing 0.2%, as initially reported, the economy actually contracted. While it is a backwards-looking report, it can give an indication of the rising dollar’s impact. “What it can tell us is a little bit about how trade is shaping up in the face of a much stronger dollar,” said Kleintop. “How much are we being impacted negatively by a rising dollar? We’ve seen trade pickup in many countries around the world, likely at the expense of the U.S. and our trade balance.”

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