background image background image background image

Earnings Watch: Can the rally extend on Q4 earnings?

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  After a wretched end to 2018, equities have been on a roll so far in the new year. The upcoming earnings season might just extend that rally further, despite growing signs of fragility in the wider economy.


The Q4 earnings season kicks off on Monday with Citigroup reporting its latest batch of figures. This earnings season may be more important than usual given the disastrous Q4 for global equities. Uncertainty remains high and the outlook has definitely deteriorated with especially China and Europe leading the declines. Today’s Sweden House Price Index (Dec) showed further deterioration in what is now the country's worst housing decline since the early 1990s.

We observe weakness in other housing markets across all continents. On top of that, high yield bond issuances have been stopped completely for 41 straight days. Targa Resources may break the stalemate in the US high yield market if it succeeds in its $1.5bn bond offering on Thursday. With global equities rallying since late December, and especially after Fed chair Jerome Powell's speech on  January 4 signalling a looser stance on balance sheet reduction, as well as and optimism over US-China trade deal, a better than expected earnings season could help extend the rally a couple of percentage points more.

Share buybacks are still intact

Despite a volatile Q4 and rapidly falling share prices, S&P 500 companies were not afraid of using the ammunition on their balance sheets to buy back their own shares. The index divisor capturing the changes in the stock capital is still rapidly falling as a function of the enormous shares buyback programmes. Q4 2018 saw the biggest decline in the index divisor since Q2 2016. In European equity markets there is not the same engine as the index divisor is not continuing to decline. This obviously reflects the lower growth, lower profitability and less robust condition of European companies compared to US companies.

High bar for Q4 earnings season

The upcoming earnings season will yet again be one of US strength and European weakness. Q3 showed the best revenue growth among S&P 500 companies in more than a decade as the bigger US deficit and tax reform helped bolster sentiment and demand domestically, while external demand was not yet weaker despite of the escalating trade war between the US and China.

As a result, the bar is set high for US companies in the Q4 earnings season. It’s our expectation that the latest margin squeeze we are observing among US companies will continue in Q4. But more important than the actual Q4 numbers is the outlook presented by management. This is especially true for cyclical companies, which depend on benign financing conditions and are often the first to feel the pain when economic conditions change for the worse.
 
Earnings preview

Below we highlight the three most interesting earnings releases next week.

JPMorgan Chase reports Q4 earnings on Tuesday at 12:00 GMT with analysts expecting EPS $2.21 up 28% from last year as the effects of the tax reform are still in place. Revenue is expected to come in at $27bn, up 6% y/y. While the earnings release is likely not be a shocker as we expect JPMorgan to deliver another solid quarter without any hiccups, the earnings release is still an important beacon for the rest of the financial industry. Any details on credit quality in Europe could be of great importance.

Netflix reports Q4 earnings on Thursday after the close. Analysts are expecting EPS $0.37, down 22% y/y and revenue at $4.2bn, up 28% y/y. In Q3 Netflix delivered a solid quarter but the competition is heating up from Amazon and more importantly from Disney entering the video streaming business this year with what is probably the most valuable video content library in the world. Netflix has saturated the US market and the company is now focusing on its international expansion with intense activity in 2019 in Europe and an expected higher spend more on original content. China is already lost ground for Netflix and the company seems to also be losing the game already in India to Hotstar (has Star India / Fox / Disney as parents) due to pricing difference. The potential big problem for Netflix shareholders is that many emerging markets are not blue oceans for Netflix and thus global dominance may not after all be the eventual outcome for Netflix.

TSMC reports preliminary Q4 earnings on Thursday with analysts expecting revenue at TWD 288bn, up only 4% y/y. The company had a tough ending to 2018 due to weaker than estimated demand for Apple’s iPhone. Growth in 2019 will come from its 7nm product driven customers such as Apple, Hisilicon, Qualcomm and AMD. In products outside 7nm we expect weakness as the industry has slowed down, but if China can kick start a rebound in its economy then TSMC could see a surprisingly positive 2019.

The table below shows the most important earnings releases ranked on companies’ market value.
 
Source: Bloomberg and Saxo Bank
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.