Earnings Earnings Earnings

Earnings hit new all-time high as inflation lifts all boats

PG
Peter Garnry

Head of Equity Strategy

Summary:  Q2 earnings are up 19% from Q1 in the MSCI World Index driven by strong earnings growth in the energy sector which is seeing its earnings jump 279% from a year ago. Revenue growth has accelerated and companies have improved margins substantially through cost reductions. It is truly inflation lifts all boats in the nominal world. We also take a look at next week's earnings releases which are getting fewer but there are still some important releases on tap.


Inflation is good for earnings in nominal terms

In a previous equity note on inflation in a historical perspective we highlighted that US earnings grew faster than the long-term trend growth during the 1970s as inflation lifts prices across the board and therefore also growth (nominal) figures. The 1970s was also a decade of very high interest rates compressing equity valuations to such as degree that the negative impact was larger than the positive dynamics from higher earnings growth. Whether those dynamics will play out again is difficult to speculate about.

What we can say is that inflation is once again lifting all boats with Q2 earnings in the MSCI World Index hitting a new all-time high up 7% y/y and 19% q/q driven by an acceleration in revenue growth (see chart below) and a significant rebound in operating margin as companies are exercising better cost controls. Operating margins are a mean reverting process and the current rebound in margins is at odds and potentially just a short-term temporary dynamic before they trend lower gain towards the average. A further slowdown in the economy would likely set in motion a renewed pressure on margins.

5_PG_1
5_PG_2

The big winner in Q2 is not surprisingly energy companies which have seen their earnings jump 279% y/y to the highest level on record. The global economy has slowed down considerably in the first six months of the year and oil prices have come down to reflect the increased probability of a recession which would impact demand. Natural gas prices are still elevated and the trading business of oil & gas majors is expected to continue being extremely profitable. It may be that energy companies have peaked in the short-term but in terms of equity valuations investors are still not paying a big premium on future cash flows from energy as ESG constraints and the green transformation are holding back institutional flows into energy stocks.

5_PG_3

The list below highlights the most important earnings releases to track next week with earnings releases in bold being the ones that can either move market sentiment or lift an entire industry.

  • Monday: Barrick Gold, Siemens Energy, Nippon Telegraph & Telephone, SoftBank Group, Tokyo Electron, Dominion Energy, BioNTech, AIG, Tyson Foods, Palantir Technologies, Take-Two Interactive
  • Tuesday: Alcon, Globalfoundries, Roblox, Trade Desk, Coinbase Global, Akamai Technologies, Plug Power, Unity
  • Wednesday: Commonwealth Bank of Australia, Vestas Wind Systems, Genmab, E.ON, Honda Motor, Prudential, Aviva, Walt Disney, Coupang, Illumina
  • Thursday: KBC Group, Brookfield Asset Management, Orsted, Novozymes, Siemens, Hapag-Lloyd, RWE, China Mobile, Antofagasta, Zurich Insurance Group, NIO, Rivian Automotive
  • Friday: Flutter Entertainment, Baidu

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.