A strong corporate earnings season propped up skirmishes this quarter, Kiwi Wealth's Associate Equity Analyst reports.
While unresolved global trade tensions, wobbles in emerging markets, and a hawkish outlook on United States interest rates might have otherwise created a negative backdrop for shares, the strong corporate earnings season has helped to prop them up, particularly in the US.
Interpreting quarterly results is not a simple task and share price reactions can often seem out of sync with reported numbers. Most analysts usually begin with the “top and bottom line.” A company’s top line is its sales or revenue for the period, and the bottom line is its net profit.
In most cases, there are two sets of top and bottom line numbers reported for companies in the US and Europe. The first set marks the actual results for the quarter, and the second set (which can sometimes be a range) gives guidance for the next quarter or full year. Often, it’s the management guidance that matters most to investors, which is why you can see a company deliver a great quarter’s earnings, but then the share price sinks because forward guidance is disappointing.
June quarter results
So, what were results like for the June quarter? Across Standard & Poor’s 500 (S&P 500) companies in the US, sales grew 10% and earnings grew 26% on average compared to same period last year. These figures came in as positive surprises of 1% and 5%, respectively, and marked the June 2018 quarter as one of the fastest-growing quarters since 2010.
Mega-cap technology companies like Apple and Alphabet provided a big boost, with record profits and healthy outlooks driving strong share price gains. In Apple’s case, the company’s market value crossed the US$1 trillion mark for the first time. This helped the S&P 500 edge up around 2% over the reporting period.
In Europe, corporate earnings expanded, although the upside surprises were much more subdued with greater variations from sector to sector. Strengths were seen in the consumer discretionary goods sector, led by companies such as luxury goods giant LVHM and global brands like Adidas and Peugeot. However, European equity prices barely moved over the reporting period.
On the other hand, emerging markets in Asia have underperformed over the reporting season despite positive corporate earnings growth. The export-oriented nature of economies in the region exposes them to high foreign exchange sensitivity. While a strong US dollar and euro might be seen as a tailwind for exports, share prices don’t always get rewarded as cross-border capital flows counterbalance the gain.
To sum up, the second-quarter earnings season has been a decent one, but the market reaction has been relatively muted. That’s because the market is already looking into next year, when the prospect of higher interest rates and the fading of US tax cut benefits will weigh on earnings and valuations. As an active investment manager, we will monitor these risks closely as we move into the latter stages of the economic cycle.
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