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Charles Stanley Earnings Tracker – Q4 2018

Each week during the earnings season, Charles Stanley Earnings Tracker looks at reported earnings from major markets across the globe and compares them with analysts’ expectations.

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by
Charles Stanley

12.02.2019

Each week during the earnings season, Charles Stanley Earnings Tracker looks at reported earnings from major markets across the globe and compares them with analysts’ expectations. It covers the S&P 500, FTSE 100, FTSE 350 and the Topix and also contains forward-looking earnings forecasts. Equity markets were weak at the end of last year, but have rebounded in 2019 so far as the US Federal Reserve took a more dovish tone. However, corporate earnings growth is needed to keep markets buoyant. Corporate earnings growth is therefore more important this year than any other since the financial crisis.                  

Jon Cunliffe, Charles Stanley’s Chief Investment Officer, said:

“Market expectations of corporate earnings growth have fallen markedly over the last three months.  This reflects a combination of evidence of a downshift in global economic activity and downwards pressure on corporate margins reflecting the effects of higher tariffs and higher wage costs.  However, whilst we are still in the early stages of the fourth quarter earnings season, there is evidence that in the US earnings growth is surprising positively.  In addition, the share price of companies which have beaten earnings guidance has, in general, been strongly positive, whilst those companies which have failed to meet expectations have not been punished as severely as in previous quarters.  However, the trend in European corporate earnings remains particularly weak, mirroring the disappointing performance of the Eurozone economy in recent months.  The bar for positive surprises in Europe is now very low, with corporate earnings expected to barely grow in the quarters ahead.  Much of the de-rating of equities witnessed in the fourth quarter reflected concerns that the US central bank was in danger of setting monetary policy too tight and causing a marked increase in the probability of a recession.  However, recent Fed guidance has been decidedly dovish and has done much to calm the market’s fears over the risk of a central bank policy error.”

This week’s key findings include:                                                     

  • The US and Japan are at the advanced stage of the fourth-quarter earnings season while Europe is at the halfway point.
  • Undeniably, there have been some rampant downgrades to earnings estimates over the past few months, most notably for US and European companies.  The derating of P/E multiples since the start of Q4 18 suggests the markets were already expecting weaker results this quarter in response to the earnings downgrades and the mixed guidance given by companies during the third-quarter reporting season.
  • However, initial indications suggest fourth-quarter results may not be as bad as originally feared, with some unexpected earnings surprises from Facebook, Boeing and Amazon and positive guidance from the likes of Apple and General Electric, which may go some way in allaying markets’ concerns about rising borrowing and labour costs and signs of economic slowdown in overseas markets. In fact, this quarter has seen the most positive stock price reaction to earnings beats on the S&P500 since Q1 2016.
  • However, the short-term outlook makes for less comfortable reading. Over the month of January, analysts lowered their earnings estimates for companies on the S&P500 for Q1 19 earnings with US companies now projected to report year-over-year growth in earnings of 0.3% with the largest declines in earnings expected to come from Materials, Energy and Tech stocks. This compares to the 5.3% growth expected by S&P 500 stocks on 1 January.
  • Granted, the downgrades have taken place prior to the Federal Reserve’s January meeting where it alluded to being open to rates being raised at a slower pace than originally planned, which should be positive for businesses so it will be interesting to see if there will be upward revisions to estimates in response to this development.
  • So far, 60% of S&P 500 companies have reported Q4 18 results. The blended (combines actual results of companies that have reported and estimates for those that have yet to report) earnings growth is 16.2% and the actual earnings growth based on only reported results so far is 18%.
  • The S&P 500 has delivered sales growth of 9% with all sectors except Staples delivering positive growth.
  • Of the S&P 500 companies that have reported 74% have beaten earnings estimates, which is above the long-term average of 64% but below the average over the past four quarters of 78%. Reported earnings are 5% above estimates, which is above the long-term average surprise factor but below the 5.7% average recorded over the past four quarters.
  • After a strong number of quarters where Energy led other sectors with extraordinary earnings growth, the sector is expected to be on course to deliver strong earnings growth in 2018 but is seeing the biggest downward revisions to 2019 full-year earnings estimates. Analysts are now expecting the sector to deliver negative earnings growth in the single digits in 2019 in response to the sharp falls in the oil price at the back end of 2018 and on concerns a slower pace of global economic growth materialising will put downward pressure on demand. 
  • In Europe, only 22% or 132 of Stoxx 600 companies have reported Q4 earnings. Today, the index is posting earnings growth of 2% dragged lower by Tech, Financials and Materials which are the only sectors posting negative growth. The Stoxx 600 is forecast to deliver Q4 earnings growth of 2.3%.
  • Of those that have reported, 53% of Stoxx 600 companies have reported earnings above estimates which is below the long term average of 50% while 54% have beaten sales estimates delivering sales growth of 13%. All sectors have delivered positive sales growth except the Communication Services sector.
  • So far, 21% or 66 Eurozone companies on the Euro Stoxx have reported Q4 results posting 1% earnings growth on the same period last year and sales growth of 4%.
  • To date, 61% of companies on the Topix have reported Q3 19 results posting a 13% fall in earnings. The index is expected to deliver earnings growth of 3% for 2019.
  • In the UK, only 6% of FTSE 100 companies have reported Q4 earnings which are up 22% with all sectors that have reported so far posting double-digit growth in earnings.

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