Key Points:
- Q3 US Earnings season was strong with 410 of the S&P 500 stock index beating consensus expectations.
- What wasn’t so strong was earnings guidance, which has led the market to downgrade future earnings expectations.
- While the outlook for US earnings looks less certain, we take some comfort from macroeconomic data which paints a solid picture of economic expansion.
Key Developments
When Fed Chair Janet Yellen made the first rate hike since the Global Financial Crisis in December 2015, investors knew the day when the markets would need to rely on fundamentals, as opposed to unprecedented amounts of liquidity, was drawing closer. Markets were given something of a reprieve when President Trump was elected as record levels of monetary stimulus were replaced with record levels of fiscal stimulus, including tax cuts, which helped aid company earnings. However, the loss of the House by the Republicans in the midterm elections has raised questions on whether further stimulus will make it through the House. It is against this backdrop that investors were watching US earnings season with interest. Here are three things worth noting:
1. Earnings Growth has been strong and has supported market returns.
The Q3 US earnings season was extremely strong. 410 companies which make up the S&P 500 index beat consensus expectations, delivering annualised earnings growth of 26%. This was the eighth consecutive quarter of positive earnings growth which has helped drive markets forward.
Source: Harbour, Bloomberg
2. Earnings may have peaked
While earnings have been strong, they have been given a strong boost from one off items like repatriated earnings which formed part of Trump’s tax package. While Q4 earnings growth is expected to be well into the double digits, the consensus outlook for earnings growth in 2019 is 8.5%, with Q1 19 earnings expected to come in at 5%.
3. Even darlings can disappoint
While Amazon beat earnings estimates, it missed on revenue estimates and its guidance was below market expectations leading to a sell-off. Alphabet also saw a derating following their performance which beat earnings expectations after adjustments but fell short on revenue expectations.
Where to from here?
At the time of writing the US market is down 10% from its September 20th peak. This price de-rating, offset by the strong earnings growth the market has experienced, has seen the amount investors are willing to pay for earnings de-rate by 17% from the beginning of the year.
When looking at the outlook for US earnings, we take some comfort from the macroeconomic data, such as PMIs, which are still painting a solid picture of economic expansion. IMF forecasts for US GDP growth also remain resilient.
Clearly, markets are grappling with a range of issues at the moment: trade tariffs, Brexit, Italian budgets, rates rises in the US and a potential softening in corporate earnings. While we may have clarity on some of these issues by the end of the year, markets will be watching Q4 earnings announcements which will start to trickle through in the latter part of January.
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