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US corporate earnings set to fall, says Smith & Williamson
Tana Focke, co-manager of the Smith & Williamson North American Trust, says squeezed margins could make life tough for US firms.
With most cost-saving measures already in place, Tana Focke, co-manager of the Smith & Williamson North American Trust fund, a pick of Citywire Selection, is worried that US companies may struggle to maintain their margins.
US market fears
Focke, who runs the fund alongside co-manager Robert Royle, is predicting 2-3% annual GDP growth for the US this year, but is worried about falling profit margins in the country’s corporate sector, with most cost-saving measures already in place and input costs rising.
The S&P 500 has gained around 12% so far this year, and Focke predicts that after such a strong run the second half of the year will be tougher going, with a fall likely at some point as companies that have already cut back costs struggle to improve margins further.
‘Things appear to be ticking along quite well, but it is hard to see how margins can really be improved further and margin compression is a worry,' she said. 'What more can companies do?’
Optimistic on US manufacturing
One potential bright spot for Focke is the rise in US manufacturing, as high energy and transport costs have reportedly spurred a number of US firms to set up new factories at home rather than further afield.
‘People are opting for having things made at home because it is easier for returning items, and sending things overseas will be very expensive,’ she said.
She cites the recent examples of a jeans company choosing the southern states rather than Mexico and a baseball-kit manufacturer choosing a site in New England.
With all eyes on the November presidential elections, Focke predicts some fiscal tightening after that point and a raft of potential tax increases, which could both weigh on the market.
At the end of February, Apple remained the £86 million fund’s top holding at 4.7% or 1.5% more than its index weight. Overall, technology makes up more than 22% of the fund, with Microsoft the second largest holding and Google also remaining in the top 10.
Robert Royle, who oversees the fund’s tech holdings, has just added a position in Cisco because he expects the firm's 10-gigabyte switches to benefit from the recent round of companies refreshing their servers.
Royle also likes the company’s focus in recent months on its core business after reining in its operations in non-core areas that had hurt its profit margins.
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