Reflections on US earnings season and what to watch this ASX confession period  Reflections on US earnings season and what to watch this ASX confession period  Reflections on US earnings season and what to watch this ASX confession period

Reflections on US earnings season and what to watch this ASX confession period

Equities 5 minutes to read
Jessica Amir

Market Strategist

Summary:  Half of the biggest 500 US companies have reported earnings results, mostly beating expectations. The key themes of rising inflation, interest rates, energy prices and commodity prices have hugely been reflected in companies results. By identifying the trends, individuals can stay nimble and make necessary portfolio adjustments. Equally with ASX confession season just kicking off, it is also important to know what to expect and what sectors to watch. Here we cover everything you need to know.


US earnings season update

Don’t blink. Equities are making wild moves in either direction as we’re in a fragile, pivotal time, as investors digest day-to-day quarterly earnings results, while holding their breath for the Fed’s next move on rates later this month.

So far this US earnings season results have been better than expected, which supported the rally from the January low. The S&P500 (SP500.I) rose 6% from 27 Jan 2022, but then quickly fell 2.4% on Thursday, falling below the 100-day average. US equities are out of correction territory, down 7% from the high, but sentiment is fragile and downside pressure remains, as inflation is at record levels and is likely to worsen with the expected rise in oil prices.  And if the Fed is more aggressive and raises rates more than expected, wind could again be taken out of the sails of tech names, high PE stocks and companies with high debt -to-earnings levels.

However equities are giving mixed messages; the technical signals suggest the S&P500 and the Nasdaq are in oversold territory, which is why retail investors are buying the dip. Meanwhile institutional investors are remaining prudent and building portfolios to weather the 2022 storms; buying into energy names, mining stocks and agricultural companies (these sectors are the best performers this year in the The S&P500 (SP500.I))

What do you need to know about Thursday’s US session? Facebook owner Meta (NYSE) reported weaker than expected results sending its shares 26% lower. Spotify (SPOT) sank 17%. In afterhours trade the mood lifted though… Amazon (AMZN) shares jumped 14%. Its first quarter sales forecasts were weaker than expected, but traders were focused on Amazon boosting Prime membership costs, which will pump up operating income more than forecast. Also afterhours, Twitter (TWTR) shares jumped 8%, Etsy (ETSY) rose 7% on buoyed sentiment. NewsCorp (NWSA) rose 7% on stronger than expected earnings, with digital real estate revenue up 35% in the quarter on strong listings under REA.

What are the big picture earnings numbers telling us? Over half (271) of the S&P500 companies reported quarterly results. Most beat expectations, with sales growth averaging 16% and average earnings growth at 30%. If you look at the key themes, industrials, oil and gas, mining stocks have produced the strongest earnings growth, and are guiding for stronger earnings ahead. While the sectors that typically suffer in higher inflation, wages and interest rate environments, (real estate) have reported the least earnings growth. Interesting, I expect the same theme to play out for the Australian earnings season that’s just kicked off.

So far in the US

  • The Industrial sector produced the strongest earnings; average earnings growth of 130%. 53 of the 68 industrial stocks in the S&P500 reported so far, with airlines doing well amid restrictions lifting; United Airlines (UAL) declared earnings growth of 77%. American Airlines (AAL) 63% earnings growth.
  • Oil and Gas companies generated average earnings growth of 170%, sales growth up 89%; benefiting from the surge in oil prices. Halliburton’s (HAL) earnings rose 100%, Schlumberger’s (SLB) earnings rose 86%. Strongest sales were in; Exxon Mobile (XOM) reporting 83% sales growth, Marathon Petroleum (MPC) 96%, Valero Energy (VLO) 116% in the quarter.
  • The Materials/Mining sector also reported stella average earnings growth of 84%, and average sales growth of 31% on commodity prices rising on strong demand and limited supply. So far, half of the mining companies (15 of the 28) in the S&P500 reported. Steel producer Nucor (NUC) reported 316% earnings growth, copper-gold-silver giant Freeport-Mcmoran Inc’s (FCX) earnings grew 146%.
  • The Real Estate sector and the Utilities sector reported the least earnings, followed by Staples.

For daily analysis on US equities, follow our head of equity strategy.

Now, what can you expect for the ASX Earnings Season after looking at the US lessons?

The Aussie share market ASX200 (ASXSP200.I) has rallied up off its 27 Jan 2022 low, gaining 3% since, and is down 7% from the high, meaning it’s no longer in correction territory. Driving the rebound, is better than expected US earnings results and local reporting numbers too, after full year reporting season kicked off this week.

What you need know about Aussie equities now? The ASX200 like the US’s S&P500 remains fragile and at a pivotal point, as investors digest earnings results and await the outcome of the Fed’s meeting later this month. The ASX200 trades below the 100, and 200 day moving average. This week the market saw a technical event triggered which could imply further downside is ahead; - the 50 day moving average fell below the 200 day. The last time this trigger occurred was in March 2020, and the market fell 37%. However, this time is different. Why? The market doesn’t not appear to be flagging the same technical overbought signals as it did in March 2020. So stay on your toes ahead of the US Fed meeting.

What are the big picture Australian earnings numbers to watch? Soft earnings growth of 12% is expected, very different to the same time last year’s 26% surge in earnings. However, it’s important to look at the key themes, industrials, oil and gas, mining stocks, which have produced the strongest earnings in the US, while the US real estate sector underperformed. So these themes will likely play out for the Australian too. What else to watch? Remember, the fundamentals…earnings growth typically drives shares price growth, along with earnings upgrades. So if results are better than expected, equities typically rally, if they are weaker, you will likely see a pull back. So what sectors should you watch?

  • The energy sector is likely to see the most earnings growth, with the market suggesting earnings per share (EPS) growth of 35% over the next 12 months.
  • The Materials (mining) sector is expected to follow with 21% forward EPS growth.
  • Communications Services with 21% forward EPS growth
  • Consumer Discretionary sector, 16% forward EPS growth
  • Information Technology sector, with 15% forward EPS growth
  • Industrials, with 15% forward EPS growth
  • Utilities with 12% forward EPS growth
  • Consumer Staples with 11% EPS growth,
  • Healthcare with 10% forward EPS growth
  • Financials 7% forward EPS growth
  • And Real Estate with 7% EPS growth.

Next week, I’ll cover some of the stocks I’m watching in resources and energy sectors and why. But for now, here are the companies reporting next week.

ASX results calendar (days are in AEST)

  • Monday 7 Jan; James Hardie (JHX)
  • Tuesday 8 Jan: Suncorp (SUN), Computershare (CPU), Shopping Centres Australasia Property Group (SCP), Charter Hall Long WALE REIT (CLW)
  • Wednesday 9 Jan: Commonwealth Bank of Australia (CBA), Mineral Resources (MIN), Northern Star (NST), BWP Trust (BWP), IDP Education (IEL), Bapcor (BAP) Centuria Capital Group (CNI)
  • Thursday 10 Jan: Downer Group (DOW), AGL Group (AGL), CIMIC Group (CIM), AMP (AMP), The ASX (ASX), Mirvac (MGR)
  • Friday 11 Jan: Insurance Australia Group (IAG)

For a global look at markets – tune into our Podcast 

For prior Australian market and APAC updates - click here. 

 


 

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