Investment Matters

US Profit Reporting Season: the market is smarter than we think

The market is smarter than we think

At this time of the year news from Australian companies is typically sparse, as they move into the first quarter of the new financial year, and most prepare for their AGM’s. 

It is therefore left to US third quarter company profit reporting season to provide the daily leads and news flow, to keep the traders in silk and the newspapers (semi) viable.

As we kick off the season, it is worth sitting back a little to digest what has occurred in the US (still the largest stock market globally) in recent times. 

SP profits

Firstly, you can see that the last 'high' in quarterly company profits (for S&P 500 companies) was in September 2014.  Since that high we have had 7 quarters of earnings below the same quarter in the prior year (or PCP as it is known).  This is the longest run of earnings declines since the GFC, and is what most of the bearish types have been banging on about for some time now.

This quarter, however, we are expecting an end to that run with current expectations for earnings to be up 15.3% on Q3 2015 (and in fact only 1% below the September 2014 all-time high).  Furthermore, the market (as it is always want to do anyway) is projecting strong earnings growth for S&P500 companies into 2017 (some 20% above 2016, and 17% above the high in 2014).

Caveat emptor however, analysts always expect strong earnings growth in the short to medium term, and it is usual that this growth level gets reduced (sometimes markedly) as the year goes on.  Still, from a base so high it is 'typically' the case that earnings growth will be positive.

So what has really happened and why has the market handled negative earnings so well?

There are always many reasons for short- to medium-term market (emotional) movements.  However, when you look at the composition of US earnings in recent years, it is clear that most sectors and industries have actually been growing, fairly consistently - except for the Energy space, where the collapse in oil prices has had a marked effect. 

SP sectors EPS

Whilst we don’t know where the oil price will head from here, the worst of the impact on the sector has passed (oil prices are now well off their lows).  This will mean the Energy space will go from dragging on US earnings growth to adding to it, once more.

It appears the market in the past two years has been looking through this almost sector specific event, and has been more focused on the wider growth picture which has remained stable, and positive.

As a result, should (again caveat emptor) earnings grow as currently predicted, it will not be a surprise to see the US market hit all-time highs once again in 2017.