Can US earnings support equities?
The US second-quarter (Q2) earnings season was seen by many investors as a welcome break from geopolitical worries and macroeconomic noise. Unfortunately, the break did not last long as investor attention swiftly returned to trade tensions and the outlook for central bank policy. Yet, valuable information has been gleamed since early July on the health of corporate America.
Strong quarterly numbers
First, US earnings are still growing. At the onset of the earnings season, the market was looking for a small contraction year-on-year (yoy) in S&P 500 earnings, a number we highlighted as very cautious. The Q2 growth rate is likely to smash market expectations and come in above 3% yoy.
In Europe, although less reliable due to differences in currencies, reporting frequencies and accounting standards, quarterly growth is still set to be around +2.5%.
US Q2 earnings growth may be low by historical standards, partly due to earnings growth of 25% between April and June 2018 on the back of the tax cuts. However, these numbers should dissipate fears of an earnings recession, or two consecutive quarters of year-on-year declines in earnings growth, in 2019.
Decent profit margins
Second, US net profit margins are stable. Rising wages are often cited as a significant downside risk to profit margins for American companies. Yet, with sales expanding by around +5% in Q2, companies’ profitably remains healthy. We believe that a combination of tight cost management and further efficiency gains should prevent shrinking margins.
Finally, US earnings expectations have stabilised. Consensus expects 2.3% earnings growth in 2019. This is unchanged from a month ago, suggesting that negative earnings revisions may have ended.
We continue to anticipate 5% earnings growth this year. However, consensus expectations for growth of +11% in 2020, are still too high in our opinion. That said, on an absolute number basis, factoring in higher growth in 2019 and lower growth in 2020 should leave earnings per share at around $180, broadly in line with consensus.
Earnings to support US equities
In the short term equities are likely to remain volatile as investor sentiment – and so valuations – swings from “fear of recession” to “hope of recovery”. Over the medium term though, prospects for earnings and dividends have the largest impact on markets as, unlike valuations, they are not mean-reverting.
With that in mind, the latest quarterly earnings growth is encouraging. While earnings expectations for 2020 may be revised lower, we expect growth to persist. This is why we remain constructive on US equities over the medium term.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS
SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.