At first glance, the current reporting season may look somewhat disappointing. In the US, aggregate earnings are only slightly above consensus, while profits in Asia have declined by more than expected. On the other hand, the financial sector in the US is surprising on…
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Mikio Kumada, Global Strategist at LGT Capital Management
the upside on a broad basis, Japan is experiencing a strong rebound, and the eurozone is holding up well in a global comparison. Thus, the overall earnings picture is good enough to sustain the bull market.
Corporate reporting season for the second quarter of 2013 progresses
In the US, about 80% of S&P 500 companies have published their results, followed by Japan (74%), Europe (70%) and Asia-Pacific (31%), while the earnings season has just started in China (7%). The global picture is therefore unlikely to change significantly. Overall, earnings were satisfactory – i.e. in line with forecasts (table 2, page 2 in the PDF). As long as an economic downturn can be avoided in the near future (as we currently expect), corporate profitability remains strong enough to support the equity markets.
Comparative earnings analysis on three levels
If we look more closely, compared to earlier stages of the equity rally, it remains important to differentiate between companies, sectors, and regions. We are now in the fifth year of the bull market – finding extremely undervalued companies with potentially resurgent profit outlooks is much more difficult today than right after the market crash of 2008-2009. Below, we summarize some key points on the current reporting season, focusing on earnings per share (EPS) at the index and sector levels as well as the individual company level. The latter completes the big picture and can balance possible distortions resulting from the extrapolation of EPS at the index and sector level (for more details, see table and chart on page 2 in the PDF).
– In terms of growth (year-on-year), Japan is leading, followed by China. Growth rates are very modest in the US and Asia, while EPS in Europe are still declining, and only Japan has a majority of sectors reporting rising EPS (nine out of ten), compared to five in Europe, four in Asia-Pacific and China, and just three in the US. Thus, there is a need to differentiate more strongly between companies, especially in the latter cases.
– However, the US makes up strongly at the individual firm level as 70% of companies have reported EPS growth – second only to Japan, with 71%. This is remarkable, because the US profit recovery is now more than four years old, while it has only just begun in Japan. The eurozone is also holding up well (51%), which is in line with Asia (52%) and significantly better than the rest of Europe (38%).
– Importantly, the US and Japan also outperformed expectations. In the US, 74% of the results surpassed the forecasts (which were admittedly rather modest), followed by 57% in Japan, where expectations were much higher. The same is true for the magnitude of the upside surprise – US earnings were only about 3% above expectations, compared to 11% in Japan. The nextbest region was the euro area with 46% of the companies beating expectations (Asia-Pacific 43%; non-euro Europe 40%).
– Furthermore, the consensus expects profit growth to pick up in all regions and most sectors after a number of weak quarters (all US sectors are forecast to return to growth, for example). Globally, earnings growth is seen rising from 8.5% in Q2/2013 to a median of 16% over the next four quarters. The eurozone is expected to rebound the most, from a decline of 4% to a gain of 41%. Only Japan’s growth rate is expected to moderate – from 95% at present to 86%.
– Finally, it is worth noting that US financial sector earnings are growing strongly on a broad basis. Although the largest increases were once again posted by the Wall Street firms, commercial banks and consumer finance businesses also reported growth rates of 26% to 56%. This is actually positive, because it could be a leading domestic economic indicator – the fact that the highly cyclical consumer discretionary sector had the next-fastest growth rate in the US offers a hint in this regard.
Source: ETFWorld – LGT Capital Management
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