China outlook outshines the US
US equities now look expensive, but China’s have priced in a lot of bad news
What an eventful summer this is proving to be. So much is happening that the Olympic Games are in danger of not making the front page every day.
owever, the news that caught my attention was the recent statement by Apple that it would revise down its earnings, having sold less iPhones than planned.
iPhone sales were disappointing in the fiscal third quarter through June, causing Apple to miss analysts’ estimates for revenue and earnings per share. Analysts had expected Apple would sell about 28m units of its flagship device. It sold just 26m. Customers waiting for the next iPhone to be released are a likely reason for the shortfall in sales. Nevertheless, Apple’s stock dropped sharply.
I don’t want to start arguing that Apple is cheap, expensive or fairly valued or what would be the best use for the firm’s mountain of cash. I just want to attract attention to the fact that if even Apple can disappoint, then the rest of the US market may be a bit stretched.
We recently did a bit of work on US equity growth and valuation metrics and found out, not too surprisingly, that margins and profitability have increased year over year for the index as a whole, and in general for every sector. Three year historical growth in earnings per share continues its upward trend, and expectations for future growth have increased year on year – that is, until the latest quarter, when expectations were revised down for the first time in a while. In terms of their valuations, stocks are generally more expensive now than they were at the end of last year.
With regard to the economic environment, the US’s ISM manufacturing index fell in June to 49.7 – its lowest level since July 2009, with the new orders component particularly hurt, dropping sharply to 47.8 from 60.2 reported in the previous month, where any number less than 50 signifies a contraction in activity. Since then, the Philly Fed and Richmond Fed surveys have disappointed further, suggesting a weaker ISM July report.
On the GDP front, the US economy grew at an annualised quarter-on-quarter rate of 1.5 per cent in the second quarter, in line with expectations. However, consumption slowed to 1.5 per cent in the second quarter from 2.4 per cent reported for the first quarter. Looking forward, growth forecasts have been revised down for the rest of 2012. China, on the other hand, was reported to have grown 7.6 per cent year-on-year in the second quarter, in line with expectations, with growth appearing to strengthen on a quarterly basis, growing 1.8 per cent quarter-on-quarter in the second quarter from 1.6 per cent in the first.
On other data points, the loss of momentum in labour market conditions continues, following the strength seen in the past year. June’s soft payrolls report continued to reinforce signs of a slowing economy. Retail sales unexpectedly fell in June, in spite of falling oil prices. A lot therefore points towards the fact that the Fed need to act. US equities appear to be expensive, with a lot of expectations still built into the valuations as the economic outlook seems to be increasingly worrying.