US Q2 earnings boom may not last much longer

US corporate profits jumped in the first half of 2017, but future gains could be challenged by sluggish American economic growth and insufficient progress on key reforms in Washington. 

Companies in the S&P 500 notched an average 10 percent rise in second-quarter profits, according to FactSet. That jump was led by technology and banking sectors, as well as energy, which benefited from much higher oil prices compared with the year-ago period. 

But analysts warn of more difficult year-on-year comparisons in the coming quarters for energy earnings.

"The oil story is almost played out," said Stephen Gallagher, an economist at Societe Generale.

Gallagher said financial stocks also are likely to see slowing growth in earnings growth, although  technology should have more sustained gains.

Another concern is that the US economy has not accelerated as much as hoped, even though it has performed adequately. 

US unemployment stands at 16-year lows, but economic growth has been well below the three percent targeted by President Donald Trump. 

"Growth in the first half of the year averaged 1.9 percent, but fell short of expectations for the surge in growth that financial market participants expected after the election," economist Diane Swonk said.

- Murky outlook in Washington -

Analysts say the lack of progress on Trump's legislative agenda is limiting economic growth.

JPMorgan Chase chief executive Jamie Dimon said last month it will be difficult to accelerate  US growth much above the 1.5 to 2.0 percent trend pace if it fails to come together in favor of pro-business policies.

"We have become one of the most bureaucratic, confusing litigious societies," he said. "It would be much stronger growth had we made intelligent decisions to end that gridlock."

Trump has eliminated some regulations, but the White House thus far has failed to unveil the promised plans for key projects such as enhanced public infrastructure spending or a comprehensive tax reform plan.

Nor has Trump said whether he will reappoint Janet Yellen to chair the Federal Reserve. National Economic Council director Gary Cohn also is in the running for the job.

"There is a lot of uncertainty," Swonk said. "It is unnecessary noise, which is deafening at times, and might dampen growth."

The murky outlook means companies are not redeploying their profits into their core businesses, she said.

"At two percent growth you just don't have the commitments to the future in terms of investment," Swonk said. 

"The profits are being redeployed in stock buybacks and dividends, which is good for the stock market, but fundamentally does not set up a foundation for growth going forward."

- European demand -

US companies have boosted profits by cutting costs. They also have benefited from a pickup in demand in key markets, including Europe.

"We heard a lot in second quarter (earnings) calls not only that the European consumer was doing better, but also that US companies with international operations have become more competitive because the dollar has been weaker," said Maris Ogg, president of Tower Bridge Advisors, an investment management firm.

But "It's a double-edged sword," Ogg said. "As time goes on, if the US companies pick up a little bit of market share, that will slow down the recovery we've seen in the last six months in Europe."

But if the weak dollar boosts multinationals like McDonald's and Boeing, it does nothing for smaller US-focused companies that do not operate overseas.