Analysis: Spin fogs full earnings story

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Analysis: Spin fogs full earnings story

After a difficult start to the year, investors may feel buoyed by a positive earnings season in countries such as the US. But not everyone is convinced by the good news, with commentators warning this may reflect nothing more than low expectations.

With the earnings season approaching an end, company results appear positive at first glance.

JPMorgan Cazenove noted last week that 86 per cent of companies have already reported in the US, with 71 per cent of European firms having done so.

The results so far could be viewed as a positive for jittery investors. According to a note from the investment bank’s research team, 74 per cent of companies in the S&P 500 index beat earnings per share (EPS) estimates.

Meanwhile the proportion of US businesses exceeding sales estimates, at 54 per cent, is up from previous quarters because of a weaker dollar.

Europe also delivered a pleasant surprise on first reading, with 59 per cent of Stoxx600 firms beating EPS estimates.

The figures hide some darker truths, however, according to the analysts. Actual EPS in the US is “running at -8 per cent year-on-year for the overall market and at -1 per cent ex-energy.

“The S&P 500 blended [first quarter earnings per share average] is tracking at $26.9 [£18.7], down from $29.1 at the start of the year,” it adds.

JPMorgan Cazenove points to similarly bad news in Europe, where overall first quarter EPS levels are down by 10 per cent on a yearly basis, and down 6 per cent ex-energy.

“Revenues are weak, too, with only 43 per cent of companies beating estimates, which we believe is largely due to the stronger euro,” the team adds. “Sales are down 7 per cent year-on-year and down 4 per cent ex-energy.”

Overall, only four sectors delivered positive EPS growth for the first quarter in the US, and just three in Europe.

Commentators have been quick to note the underwhelming nature of the latest data.

Whitechurch Securities’ Gavin Haynes and Ben Willis said they were factoring in a raft of “uninspiring corporate profits” and, in sum, an unremarkable earnings season.

“The earnings season has been decidedly mixed so far,” the pair say. “While many companies have beaten expectations, this is due to heavy analyst downgrades.”

They also point to the fact earnings for the S&P 500 were down by 3.7 per cent compared with the first quarter of last year, adding: “This will be the first time the S&P has seen four consecutive quarters of year-on-year earnings declines since the onset of the global financial crisis.”

Others question what this means more broadly for risk assets, which may struggle to rally any further this year in the absence of supportive fundamentals.

Larry Hatheway, group chief economist for Gam, believes the rally witnessed since mid-February may not prove sustainable.

“The key question is whether risk assets, and in particular global equities, can maintain their strong momentum,” he explains.

“We believe this is unlikely. Growth surprises are nearing extremes and are, therefore, less likely to be supportive.

He predicted last month: “The first quarter earnings season is likely to deliver poor results, including outright declines in aggregate US corporate profits.”

Some believe the earnings season could also hold sway in monetary policy decisions.

Guy Stephens, managing director of Rowan Dartington Signature, fears the weak earnings season could leave monetary policy looser for longer, both in the US and globally, as it provides another reason for the Federal Reserve to delay further rate increases.

“The Federal Reserve removed its reference to global concerns from the Federal Open Market Committee statement [on April 28], although most commentators now expect a rate rise in July rather than June, in light of the soft first quarter US earnings season,” he says.

Mr Stephens believes delays by the Fed in further hiking rates could have a knock-on effect globally, and hinder the development of some sectors, such as banking.

“The sooner US rates move further along their journey of interest rate normalisation, the sooner other countries may realise the fallacy of their continuation of QE and negative interest rate policy,” he says.

“This may then result in a healthy and robust banking system, which is the lifeblood of a successful capitalist economic model.”