US reporting season is just round the corner

After a particularly poor quarter, markets prepare for the next reporting season.

American flags
Source: Bloomberg

The past few months have seen markets focused on a plethora of economic data releases. This has been coupled with enlightening commentary from central bankers with specific reference to likely timelines for interest rate changes. We are now less than two weeks away from the start of the next US reporting season – Alcoa is due to kick things off after the markets close on the 8 October, posting its Q3 figures.

Volatility has picked up over this time with oil, inflation, interest rate expectations, China and lately corporate disasters all contributing to equity prices having an unseasonably choppy time. The third quarter of the year will have seen around $11 trillion being wiped off the value of global equities, so will this next round of earnings releases give market participants a reason to relax or add to the uncertainty?

The big questions are, firstly, will the markets be able to unshackle themselves from the fear that has descended over traders during the last 3 months? Can we see a return to the ‘buy on dip’ mentality that has been so prevalent in the previous couple of years? Secondly – if the markets can do that, will these third-quarter corporate releases be sufficiently positive to be the catalyst?

One area for optimism is that with the selloff in equity prices the earnings multiples of companies has been improved from the last quarter. Considering that we are now three months closer to the US raising interest rates (although expectations have probably shifted by three months too) the squeeze this will have on corporate America should not be too extensive, but will trigger the start of a more tempered aggression as far as company expansion is concerned regardless of how well sign posted this will have been.

The last reporting season saw the usual template of companies comfortably beating institutional expectations. As the table below highlights it has now become the case that institutional analysts undershoot targets more frequently than not. The stand out figures are not from those companies with better-than-expected data, but those who fail to meet this requirement. Looking at these figures, it is also worth noting that all the US sales figures out perform less frequently – the inverse of what has happened in the Bloomberg European 500.

Index Q2 outperformance %
Dow Jones Industrial Average  
  Earnings 83.33
  Sales 63.33
S&P 500  
  Earnings 74.14
  Sales 49.09
NASDAQ  
  Earnings 58.75
  Sales 54.95
Bloomberg European 500  
  Earnings 61.92
  Sales 67.59

 

As worried as investors might be over equity markets, the brutal truth is that holding cash has been, and will continue to be, a particularly poor option for investors. Interest rates will rise, but almost 40 central banks have cut rates this year, and the Bank of England and the US Fed are the only two standout central banks looking to reverse this process.

The US has now finished its QE process but the European Central Bank has now been handed the baton. The markets are already assuming the September 2016 end date that is currently penciled in is almost certain to be extended. The consequences of this have been bond markets offering yields that have struggled to attract investors and debt rating agencies that have slashed their ratings.

All of these factors have contributed to making the equity market, by default, the most attractive home for funds. The table below shows exactly how equity index yields have improved from the beginning of the year to date.

Index Date Div yield (%)
Dow Jones Industrial Average  
  Jan-15 2.18
  Sep-15 2.62
S&P 500  
  Jan-15

1.95

  Sep-15 2.24
NASDAQ  
  Jan-15 1.28
  Sep-15 1.32
Bloomberg European 500  
  Jan-15 3.72
  Sep-15 3.68

 

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