U.S. corporate profits are stagnating due to the trade war -- and lower interest rates are not going to fix this problem.
Both markets and the Federal Reserve (Fed) are challenged.
Equity markets have been focusing on shifts in sentiment related to the ebbs and flows of the trade war. A ceasefire, and equities go up. More tariffs or acrimony, and equities go down. The trade war sentiment shifts have dominated a key fundamental -- namely, the stagnation of profit growth.
The Fed has its own challenges. Having cited the trade war-induced slowdown in business investment as one reason to cut rates back in July, the Fed may follow with another cut in September. But will it do any good? No.
The problem with business investment is uncertainty over tariffs and supply chains. Profit margins have been squeezed because corporations have been unable to raise prices due to fear they will lose market share. Giving the market a rate cut will not help the fundamental problem.
The impact on U.S. real GDP has also come from declining business investment. Companies' long-run business investment plans have been delayed or indefinitely postponed, and this can clearly be seen in the investment category of real GDP. This category is relatively small in its total impact on GDP; however, the U.S. economy has clearly decelerated even if a recession is unlikely.
Companies have lost pricing power. So, profit margins take the hit, and equity valuations are seriously impacted by any escalation of the trade war.
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