The breakdown of the BEA profits data released on December 22nd suggests equities are well placed to extend their rally in 2017. Strong profits in the retail sector shows how companies are able to cut costs and raise margins while delivering lower prices.
As a result, inflation could remain well behaved as growth accelerates. The 2016 PwC Global Innovation 1000 survey revealed that the US is leading a shift in R&D to software that will enhance the ability of companies to control costs.
The Fed will still hike rates, and bond yields will rise too in 2017. However, this will reflect the normalisation of monetary policy and the yield curve in a ‘post-crisis’ era. This should not impact adversely on equities. The reverse earnings yield gap remains historically low.
Summary
- Profits breakdown bullish for equities
- Growth accelerates, but inflation dips
- PwC survey underlines comparative strength of US
