Investment Matters

This week saw the bulk of US quarterly earnings delivered.

This profit reporting season has been disappointing, with US earnings currently 2.2% below this time last year, down 1% on last quarter and 12.7% off the last 12 month high in earnings (set in August 2015).

As has become a tradition now, profit reporting season news-flow is dominated by analysis of results “versus expectations”.  This renders it an almost predictably benign event, given that most companies that anticipate poorer profits will leak out to analysts the poorer outlook.  And so the analysts will have already downgraded client expectations in the month prior to reporting.  So when the actual result is announced, it often meets or exceeds the downgraded expectation, making for a comfortable results' season.

(Companies do this softly, by calling around analysts to check their numbers versus others' expectations, thus corralling everyone into line).

As a result, it is usual (absent extreme business conditions) for more than 70% of companies in reporting season to report results “ahead of expectations”, thus making it a relatively positive time for companies and their chieftains. And those who believe in pixies.

What is usually less focused on is the absolute level of earnings (i.e. profits) itself, and where they are given what people were expecting 1-2-3 years ago.

This season has been disappointing in this regard with US earnings currently 2.2% below this time last year, down 1% on last quarter and 12.7% off the last 12 month high in earnings (set in August 2015).

Additionally, they are ~2% lower than what was expected only a month ago (the difference between growing and declining earnings). This has resulted in earnings expectations for profits in 12 months’ time to be accordingly readjusted down ~2-3%.

For some time, it has been noted that the fall in the oil price has had a large impact on US corporate earnings.  However, in the most recent quarter the oil price increased 3% at a time when US profits were declining.  This season has shown that US corporate profitability is weak, with even the assistance of significant share buybacks (as previously discussed) and now improving resource pricing (quarter on quarter) failing to help lift earnings.