US Reporting Season: what to expect from this quarter’s results
This US reporting season, on balance, is shaping up as a negative one.
When is US Reporting Season?
The US Reporting Season for Q2 kicks-off in the middle of July and will extend to around the middle of August.
The market data that matters (S&P500):
Forecast EPS Growth (YoY)
Forecast Revenue Growth (YoY)
Current Dividend Yield
What is the market expecting out of this earnings season?
This US reporting season, on balance, is shaping up as a negative one. Despite the US stock market hitting fresh all-time highs in July, earnings growth is forecast to have fallen on an annualised basis last quarter, as slower global economic growth apparently manifests in corporate America’s profitability. Of course, the recent records registered on Wall Street has little do with these fundamentals, with market prices instead driven by expectations for imminent interest rate cuts from the US Federal Reserve. Though this dynamic ought to persist in the near-term, a bigger deterioration in company fundamentals will likely stifle upside momentum in the market.
What are the key themes to watch out of earnings season?
1. EPS and softer growth
Annualised earnings-per-share growth is expected to have contracted this quarter by -2.7%, to around $40.43 per share. This will come despite a modest lift in revenue growth, which is expected to have expanded by 1.4% last quarter. The core driver behind the sluggish earnings environment appears to be the global economic slowdown – catalysed, more specifically, by higher global trade barriers. A glance at which sectors ought to underperform most this reporting season betrays this fact: earnings growth is expected to have contracted most in growth-sensitive, cyclical stocks in the energy, materials and information technology sectors.
2. The influence of the Fed
The prospect of looser financial conditions in the United States has goosed the market, and driven capital flows into US stocks. Interest rate markets are presently expecting that the Fed ought to cut interest rates four times in the next 12 months, in a pre-emptive strike on a softer economic growth outlook. Falling risk-free rates have had the effect of improving valuations, while also boosting the relative yield US stocks pay over fixed-income assets. The benefit of the Fed’s recent policy shift is slowly diminishing however; investors will be looking for improvements to the earnings outlook to justify directing capital flow into the equity market.
3. The forward guidance
A contraction in earnings growth for the US equity market is considered a foregone conclusion. Markets have naturally discounted this fact, so the greatest premium this reporting season will be on forward guidance. Despite clear economic headwinds, analysts are expecting that earnings growth ought to return to positive territory in the year ahead. Consensus estimates suggest earnings should expand by 12.8 per cent by Q2 next year, with the current 12-month Forward P/E ratio a historically appealing 17.20, right now. It’s an optimistic appraisal of the market by equity-analysts for the year ahead; so positive guidance from US corporates will be searched for to justify this view.
How could this earnings season impact the financial markets?
Earnings season has a tendency to inspire rallies in the market. The logic is twofold: market participants reduce exposure to stocks leading to greater event risk; while corporates try to overdeliver on expectations when reporting to the market. The bar is certainly set low overall for this quarters’ earnings. But of course, with major economic headwinds ahead, earnings misses and pessimistic rhetoric from American corporates can’t be ruled-out. A positive earnings surprise ratio in excess of 75 per cent, combined with solid guidance, will likely support a push by the S&P500 above the lofty 3000-mark, while the opposite may drive a sell-off in the index into the 2900s – and towards its longer-term averages.
2. Cross-market view
Being at the centre of the stock market universe, moves in the S&P500 will resonate through global equity markets, and drag the world’s other major share-indices in whichever direction it goes. Assuming an overall positive surprise out of US reporting season: US Treasury yields ought to lift, supporting a recovery in the USD – especially against the Greenback’s G4 counterparts. The bullish sentiment would also likely knock-down gold prices, the Swiss Franc and other safe-haven assets. While commodity prices, on the whole, could be given a temporary reprieve from trade-war fears and stage its own small rally, possibly boosting commodity currencies on a relative basis.
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