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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. It covers the S&P 500, FTSE 100, FTSE 350 and the Topix and also contains forward-looking earnings forecasts

Compture with arrows stocks

by
Charles Stanley

in Features

15.02.2019

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.
  • While market expectations for fourth-quarter earnings have been weaker due to signs of a slowdown in economic growth in major markets towards the end of last year, broadly speaking, fourth-quarter results have not been as bad as originally feared, although earnings growth is lower than what it has been in previous quarters.
  • In the US where 73% of S&P500 companies have reported earnings, 73% have beaten estimates by 5%. This is below the average over the last four quarters of 78% but comfortably above the long term average of 64%.
  • 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 17%.
  • However, the short-term outlook makes for less comfortable reading. Analysts have been lowering their first-quarter 2019 earnings estimates for S&P 500 companies. US companies are now projected to report earnings growth of -0.3% for the first quarter with Materials, Energy and Tech stocks expected to report the biggest declines in growth followed by Communications and Consumer Discretionary. This is likely to be in response to the higher proportion of negative earnings pre-announcements to positive earnings pre-announcements for the first quarter compared to previous quarters. So far, the negative-to-positive ratio for first-quarter earnings is 2.5x meaning there has been more than twice the amount of negative pre-announcements to positive pre-announcements for first-quarter earnings given by companies during this reporting season. This compares to a ratio of 1.1x a year ago.
  • Notably, the five S&P 500 sectors expected to see negative growth in the first-quarter are the most geared to cyclical growth and more likely to comprise of overseas earners. Furthermore, the downgrades to first-quarter estimates have taken place over a short space of time. On 1 January the S&P500 was expected to see earnings growth of 5.3%, which was already much lower than the growth seen in previous quarters.
  • Following the Federal Reserve’s January meeting where it alluded to being open to rates being raised at a slower pace than originally planned, which is normally seen as supportive for businesses, it will be interesting to see if there will be upward revisions to estimates for upcoming quarters and full-year 2019 estimates in response to this development.
  • In terms of sales growth, the S&P 500 has seen a 9% increase in fourth-quarter sales on the same period last year with all sectors except Staples delivering positive growth led by Communications, Consumer Discretionary and Energy.
  • 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 for 2018 but is seeing the biggest downward revisions to 2019 full-year earnings estimates. Analysts are now expecting the sector to post a 9% fall in earnings 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 reduce demand for energy.
  • In Europe, 30% of Stoxx 600 companies have reported fourth-quarter earnings. Today, the index is posting earnings growth of 7% which is above the 3% growth forecast for the Stoxx 600 for the fourth quarter. All sectors except Tech, Materials and Consumer Discretionary are posting positive results with Tech leading the decliners.
  • Of those that have reported, 53% of Stoxx 600 companies have reported earnings above estimates which is above the long term average of 50%, while 56% have beaten sales estimates delivering sales growth of 12%. All sectors have delivered positive sales growth except the Communication Services sector.
  • So far, 31% of Eurozone companies on the Euro Stoxx have reported fourth-quarter results posting 1% earnings growth on the same period last year and sales growth of 5%.
  • To date, 81% of companies on the Topix have reported third-quarter 2019 results posting a 9% decline in earnings while sales are up 5% on the same period last year. However, the bar has been set low for Japanese companies who are expected to see earnings rise by a modest 3% for 2019.
  • In the UK, 9% of FTSE 100 companies have reported fourth-quarter earnings which are up 25% with all sectors that have reported so far posting double-digit earnings growth.

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