US corporate profits are stagnating due to the trade war – and lowering interest rates will not solve this problem.
The markets and the Federal Reserve (Fed) are contested.
Stock markets focused on sentiment shifts related to the ebb and flow of the trade war. A ceasefire, and the actions go up. No more tariffs or acrimony, and stocks go down. Sentiment shifts over the trade war dominated a key fundamental, and that was stagnant earnings growth.
The Fed has its own challenges. After citing the trade war-induced slowdown in business investment as one of the reasons to cut rates in July, the Fed could 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 were reduced because companies were unable to increase their prices for fear of losing market share. Giving the market a cut in rates will not solve the fundamental problem.
The impact on the real GDP of the United States is also attributable to the decline in business investment. Long-term business investment plans have been delayed or postponed indefinitely, and this is clearly seen in the investment category of real GDP. This category is relatively small in its total impact on GDP; however, the US economy has clearly decelerated even though a recession is unlikely.
Businesses have lost their pricing power. As a result, profit margins suffer and stock valuations are seriously affected by any escalation of the trade war.
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