The global earnings season, now in its late stage, has confirmed that the big picture remains constructive. Corporate strength in the US and Japan continues to dominate the current situation, ...
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Mikio Kumada, Global Strategist at LGT Capital Management
but earnings momentum outside of the US is expected to shift primarily in Europe’s favor going forward. Moreover, with the major economies now expanding synchronously for the first time since 2010, earnings are also expected to start growing in most regions – at a faster overall pace.
Global earnings season has entered late stage
The reporting season for the third quarter of 2013 began on 8 October, almost exactly one month ago. The LGT Beacon wrote about the positive global corporate earnings outlook of companies on the following day. Since then, at the global level, approximately 68% of the publicly-traded companies have published their quarterly reports, and practically all equity indices have recorded significant gains. Companies from Japan and the United States once again led those whose earnings surprised on the upside.
US companies enjoy moderate but stable growth
Japan was able to comfortably and clearly beat consensus forecasts, despite the elevated level of expectations. Japan’s current contribution to global earnings has been extraordinary since late 2012, and is set fade over time – simply because of the base effect. After all, it is nearly impossible for any mature market to keep doubling aggregate profits for a prolonged time, of course. US results are thus more important as a basis. US earnings per share are no longer growing as strongly as at the start of the recovery that began more than four years ago. In more recent times, US profits haven been growing only moderately – but reliably, and without being exposed to strong swings and big surprises. In addition, they have been consistently beating consensus since early 2009. As the result tables on page 2 show that the most recent quarter was no different for the US.
Mixed results in most other regions for now
The results from the other regions, where the reporting season still has way to go, are more mixed at the present time. On the global level, EPS grew by 8.2%, which is quite decent – i.e. much higher than sales growth and well above global economic growth. The global growth rate is somewhat lower than expected, but that setback is mitigated by the fact that the profit disappointments are concentrated on a limited number of market segments in Europe, China and Asia-Pacific. At the same time, comfortable majorities of companies delivered higher than expected profits in the US, Japan and the non-euro European countries.
Shift in income trends in favor of Europe
Since late 2012, global earnings were primarily driven by developments in Japan and the US. Going forward, most analysts expect US to further gain momentum, with developments in the other regions shifting in favor of a stabilizing Eurozone. Europe’s currency union is expected to stop being a drag on global profits in the near future. Japan’s contribution is expected to fade markedly – after EPS growth rates have ranged between 97% and 295% over the previous four quarters. However, Japan’s contribution is still expected to remain positive. Growth forecasts for most other regions have also been trending lower in recent days.
Synchronous profit growth in most major regions envisioned
Still, this should not obscure the fact that earnings in coming quarters are likely to not only grow simultaneously in most regions, which is a rather rare event in itself – they should also expand at a faster pace. The downward consensus estimate revisions for are not a major worry – such downgrades are common even during bull markets. Furthermore, US and Japan earnings have been consistently underestimated since the beginning of their respective recoveries, indicating an “inherent” bias by most analysts to err on the downside.
At the same time, consensus forecasts for markets that were widely regarded as “growth markets” have been consistently too optimistic in recent years. Given the long period of relative weakness in emerging market equities, the gap between actual and expected performance might have narrowed considerably in the meantime, which would constitute a constructive factor that should help these markets stabilize and turn around eventually.
Market View
Selected Benchmarks
Slightly accelerated global profit growth
The first table summarizes the corporate results for the third quarter of 2013 in the main markets, ranked by market capitalization. In addition to last quarter’s earnings and sales per share, we also show the median growth rates of the four quarters forward and backward. Based on this, median global EPS growth should pick up from around 11% to about 12% over the coming year, primarily because companies in Europe, representing 21% of the global market capitalization, are expected to return to steady profit growth. Earnings in Asia-Pacific and Brazil are also expected to return to growth, while Chinese companies are forecast to report faster profit gains. These developments, if they occur, should more than offset the anticipated profit slowdowns in the US and Japan.
Tendency to underestimate the core markets
It should be noted, however, that the consensus has been quasi-systematically underestimating US earnings for nearly five years, and Japanese earnings since mid-2012 – i.e. broadly since the start of the respective bull markets. European estimates vary in their accuracy, and have generally tended to be too high for most Asian and the emerging markets in recent years. Whether these (remarkably stable) biases have fundamentally shifted remains to be seen, but the consensus is probably right in terms of the global aggregate direction.
Consensus is right about the global aggregate trend in absolute terms
The second table analyzes the aggregated results in more detail. In Q3/2013, a majority of sectors (9 of 10) beat consensus estimates in Japan and the US. A similar picture favoring these two markets emerges when we look at the percentage of individual companies that beat forecasts. Focusing away from the consensus targets produces a more benign picture as a majority of companies is enjoying growth in all markets except the Eurozone. This also implies that the consensus will probably be right in terms of the aggregate direction of earnings. How the results will fare relative to expectations remains to be seen. Conservative estimates and downward revisions could well prove to be part of the very same process that will ensure these two markets end up beating expectations again.
Source: ETFWorld – LGT Capital Management
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