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.
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.
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.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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