Earnings Watch: Can Q4 earnings swing into growth?
Head of Equity Strategy
Summary: The Q4 earnings season was off to a mixed start last week with especially the negative response to earnings from three major US banks on Friday. We maintain our positive view on US banks due to more stimulus and our conviction idea for 2021 being reflation. We also take a look at long-term changes in quarterly earnings and how the equity market has mostly been carried by lower discount rate of future cash flows rather than earnings growth. Finally, we take a look at this week's most important earnings releases.
Last week’s earnings releases were the starter before the main course starts this week. Major US banks reporting on Friday were selling off on back of Q4 earnings leading the broader equity declines into the weekend. As we alluded to in our review of these banking earnings, the market was overly pessimistic on those earnings as the outlook was improving in the banks’ earnings statement and those outlooks are naturally not factoring in the upcoming stimulus checks from the new Biden administration. This stimulus will act as a backstop on credit deterioration and bolster the banks’ balance sheets providing the opportunity throughout 2021 to release income from the loan loss reserve account. That coupled with reflation trades and the rising yield curve will help US banks this year. We maintain our positive view on US banks in 2021.
The Q3 earnings season was the turning point with earnings rebounding strongly from the bottom in Q2 and expectations are that earnings will continue to grow q/q. The new restrictions that were introduced across many European countries as the second wave of Covid-19 accelerated have likely prevented corporate earnings from increasing significantly in Q4, and thus it is difficult to expect earnings growth y/y in Q4. However, Q1 helped by base effects will begin to show earnings growth y/y, but for the next year the q/q changes will be the only indicator on earnings we can rely on as the large base effects will make y/y numbers meaningless. Based on the current earnings that are for Q4, the MSCI World Index EPS in Q4 is down 6% compared to S&P 500 where EPS is down 10% y/y.
Our long-term chart on quarterly earnings show another startling fact. Quarterly earnings so far in Q4 2020 for MSCI World is down 0.2% annualized since Q2 2007 which means that after inflation corporate earnings are negative in real terms over 13 years. Only central bank action lowering the discount rate on future cash flows has supported the bull market in global equities. The annualized growth rate for quarterly earnings is 3% in S&P 500, which means a low positive real rate growth rate in US corporate earnings.
This week’s most important earnings are highlighted below with the ones marked in red being those that are worth watching for macro or equity sentiment reasons. Netflix reports tomorrow with a high bar to climb following its disappointing Q3 earnings. Higher subscription price in the US will help on revenue growth but investors will demand strong numbers on net new subscribers or else the stock will be punished.
- Tuesday: Charles Schwab, Bank of America, Goldman Sachs, State Street, Netflix
- Wednesday: Interactive Brokers, Kinder Morgan, ASML, Fastenal, Morgan Stanley, Discover Financial Services, P&G, UnitedHealth, US Bancorp, Bank of New York Mellon
- Thursday: Gilead Sciences, Sandvik, Investor AB, Fifth Third Bancorp, Intel, IBM, Intuitive Surgical, CSX, PPG Industries, Truist Financial, TAL Education, Travelers Cos
- Friday: Schlumberger, New Oriental Education & Technology
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.