EQUITIES 5 minutes to read

Earnings Watch: Springtime has arrived for earnings

Peter Garnry

Head of Equity Strategy

Summary:  Equities have steamed higher in the past few months, powered by dovish monetary policy, trade deal optimism and improving Asian macro figures. But could earnings estimates
downgrades indicate that the train is now slowing down?


The fourth quarter of 2018 was not only destructive for share prices but also for earnings estimates across all of the world's major equity indices. But with the Fed’s historic pivot on monetary policy and improving data out of Asia, equity markets have shrugged off the carnage of Q4 2018. US equities have almost made a full comeback to last year’s all-time-high level with the S&P 500 only 2% from its September zenith. The drivers are monetary policy, optimism over a US-China trade deal, improving Asia macro figures and with the Q1 earnings season starting next week, maybe a fourth engine can be added to global equities.
Enlarge
Source: Saxo Bank
While the S&P 500 has regained lost terrain in terms of price, earnings estimates on the index are still far from the peak (see chart). Sentiment has improved much more for Chinese earnings (green line) with earnings estimates now above their top from the second half of last year. If one looks at sell-side analysts’ earnings revisions the past couple of weeks, European earnings stick out (orange line), having been significantly been revised higher. In other words, it seems that springtime has also arrived for equity markets and earnings estimates. 
Enlarge
The downside risk going into Q1 earnings season is the high expectation discounted in price levels. With earnings estimates on S&P 500 not near last year’s peak while the index price is back to the highs and the forward valuation multiple has expanded. This means that if US companies do not deliver in Q1 we could easily see the earnings season turn into headwinds for at least US equities which are also still among the most expensive in the global equity market.

The table below shows next week’s releases from the 30 largest companies among the 2,000 companies we track during the earnings season. As usual the focus will be on Friday’s earnings among US banks such as JPMorgan Chase and Wells Fargo. With the recent US yield curve inversion investors would like strong outlooks from management to offset negative earnings expectations based on yield curve inversion.

Perhaps next week’s most interesting earnings release might come from an obscure corner of the global equity market. The Swedish investment company Industrivärden reports Q1 earnings on Tuesday. The company has holdings in many of Sweden’s largest publicly listed industrials and as such has a good feeling about the outlook for manufacturing. Sweden is one of the more cyclical economies in Europe and Industrivärden’s portfolio companies have broad international exposure. It might be worth listening to what the Swedes see in the manufacturing part of the economy. 
Enlarge
Source: Bloomberg and Saxo Bank
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)