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Corporate Revenues Shows Commercial Warfare Starting to Tense US Economy

The buyer was spotted at a Target store in New York's Brooklyn Quarter.

Brandon McDermid | Reuters

Looking for reasons to be optimistic about the US economy? Try the trails at Target.

Target's shares rose more than 20% to a record $ 103 a share on Wednesday after the retailer reported a 17% jump in second-quarter earnings, higher sales and a year-over-year forecast as high [1

9659002] The retailer and some of its major competitors, such as Walmart, are distinguished in what is set to be a season of profit for US companies as a whole. The S&P 500, with more than 94% of its companies reporting the most recent quarterly earnings, is on track to grow a 1.2% quarterly profit increase from a year earlier, according to Wednesday afternoon's Refinitive data. Sales of the 500 largest US publicly traded companies rose 4.7% on average over the last quarter, the slowest quarterly growth rate since the third quarter of 2016.

stock market volatility, and when forecasts diminish the prospects for economic growth, trade tensions increase and the price of imported goods rises, and economists scratch their heads to find out if we are heading for a recession.

"We have reached a very high plateau, but it is a plateau," said David Kelly, chief global market strategist at J. P. Morgan Asset Management.

The US economy expanded by 2.1% in the second quarter, the lowest rate since the first quarter of 2017, and up to 3.1% in the first three months of this year. Federal Reserve members expressed concern last month about weak sectors of the economy such as manufacturing. They said the trade uncertainty against the background of the tit-for-tat trade battle with China, combined with concerns about global growth, continues to "weigh on business confidence and capital expenditures," according to a July Fed minutes. at that meeting, the Federal Reserve cut interest rates for the first time in a decade, but a protocol released Wednesday said the move should not be seen as a "pre-set rate" for future layoffs, meaning companies could cannot rely on loans with lower interest rates.

But strong job growth, wages that go up – if slowly – and stable consumer spending, nourish the economy and some pockets of strong revenue.

"The economy does not seem to go into recession because the consumer is still strong," says Jeremy Tsirin, head of US equities at UBS Global Wealth Management.

Consumers are still spending, but growth has slowed

US consumer spending, which drives the lion's share of the economy, is growing, but at a slower pace. US consumer spending rose 0.3% in June, down from the 0.5% monthly increase it noted in May, the Department of Commerce said late last month. But retailers' earnings reports show that companies are still growing while their weaker competitors are struggling as US shopping habits continue to change.

"The main US consumer is doing well, making more money, being hired, and more importantly, spending more money," Bank of America CEO Brian Monihan said in an interview with CNBC on Tuesday, adding that the bank owns its customers spend more. "The US consumer continues to spend and this will keep the US economy in good shape."

USA. For example, airlines that make money from flying passengers and selling miles with frequent flights to banks that offer rewards to customers who spend with co-branded or other credit cards for rewards are on track for the tenth consecutive year of profitability. Managers of major carriers said in earnings calls last month that a strong US economy helped them increase revenue.

Not all retailers are equal

But spoils do not spread equally.

In the retail market, store names such as Target and Walmart, which have invested in their companies to better take over Amazon, have shown strong results.

"There are clear winners and losers in the industry today … and winners are companies like Target investing in stores," Target CEO Brian Cornell said in a media call after accounting for Wednesday's earnings. He did not specifically name companies, but said there were "share donors" to help target Target.

Stores that anchor US malls such as the troubled JC Penney and Macy's continue to struggle as fewer and fewer consumers search for such large shopping malls to buy clothing, accessories, and other goods. Instead, one-stop shopping destinations like Target and Walmart are appealing to more consumers with their updated brands, a wide selection of national labels, fast shipping options and real estate spread across the US, which puts them closer to home customers. [19659002] JC Shares of Penney fell below $ 1 last month, putting it at risk of falling out of the New York Stock Exchange.

"These retailers are an example of the bifurcation that occurs in retail between larger caps, out-of-mall chains and retailers experiencing a chronic decline in traffic," said the founder of Retail Metrics by Ken Perkins. He said many clothing chains are the ones still struggling.

Urban Outfitters this week reported a 35% drop in second quarter earnings and slower sales. L Brands, parent of Victoria's Secret's underwear company, reported higher-than-expected earnings this week but lower sales. Barnes New York filed for bankruptcy protection this month and said it plans to close stores in Chicago, Las Vegas and Seattle.

Even company executives who are doing well are cautious. Home improvement giant Home Depot beat earnings forecasts this week, but narrowed its prospects because of the potential impact of tariffs on its business.

Weak adjustments

However, there are weaker spots in the economy.

Lower fuel prices have hurt the performance of energy companies in the last quarter, while global trade tensions, weaker growth and tariffs weigh on materials and the industrial sector. The Boeing 737 Max crisis, stemming from two fatal crashes, prompted the company to report its biggest loss so far in the second quarter. In addition, it delayed production and halted deliveries, influencing several suppliers, including the already struggling General Electric, which makes engines for the dressed planes with its French partner for the Safran joint venture.

"I think it's always better when the economy shoots at four cylinders," said Kate Warne, chief strategist at Edward Jones, who noted that companies in general "had more inclination this year."

However, profit growth appears weak compared to last year, when large corporations reported a surge in profits after a large reduction in corporate tax, she said.

Fragile Business Confidence

As profits recover 10 years after the US recession, workers are pushing for better wages and benefits, forcing some companies to pay higher wages, just as companies try

"The level of revenue is spectacular, but it is very difficult for companies to maximize profits from here," says Kelly J. P. Morgan. "When you go to very high levels of profit, workers know everything, and pay-or-give-me requests tend to grow."

The thing to keep track of is business confidence, even more than consumer confidence because it will dictate future employment levels, he added.

"There is some instability in business confidence. We think we will avoid a recession, but there is an increasing call," Kelly said.

CNBC & # 39; s Lauren Thomas and Jasmine Wu [19659037] contributed to this report.

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