US Reporting Season
We cast our gaze over to the US this week, which is mid-way through its reporting season. Over 40% of companies have reported their second-quarter earnings thus far.
77% of these companies have beaten earnings estimates, which is above the 5-year average (Source: Factset).
The US market (S&P500) has subsequently reached a level of 3,000 this month and has delivered a return of 6.8% for the rolling year to date (to July 31st).
However, reported earnings have beaten what have been rather subdued expectations.
Clearing a low bar
The rally in the S&P500 has been against a backdrop of weak absolute performance against sanguine expectations for earnings growth.
Earnings in the first quarter of the year declined by 0.3%, while it is estimated that earnings will decline by a further 3% in Q2.
Thus far in Q2, performance indicates earnings will decline by 2.6%.
While technically this means results may “beat” expectations, such performance is lacklustre and would represent the first “earnings recession” (two successive quarters of earnings declines) since Q1/Q2 2016.
Trump, Trade and Tariffs
If we drill down further into these results, we see that significant pain has been worn by companies exposed to global trade.
Dividing the S&P500 into two groups: those that generate more than 50% of sales inside the U.S. and those that generate less, we see that earnings growth has been 3.2% and -13.6% respectively.
This huge disparity shows that trade tensions and a strong US dollar are having a very real and large impact on company performance (and more broadly on global growth).
In fact, six sectors within the index are reporting a year-over-year decline in earnings, including the Materials, Industrials, Energy and Information Technology.
Furthermore, expectations are for a continued decline in performance, with analysts projecting a decline in earnings of -1.9% for Q3.
While overall earnings growth in 2019 is expected to be around 1.7%, this will depend on 4.9% growth materialising in Q4.
This would imply a material increase in activity and a swift resolution to the trade and currency headwinds facing the US economy.
Read through to Australian reporting season
Expectations for earnings growth in FY-19 for the Aussie market are similarly sanguine.
Consensus expectations for FY-19 EPS growth (ex-resources) are +1%, which have been revised down from approximately +4.7% earlier in the year (Source: Morgans).
It is clear that trade tensions, amongst other factors, are having an impact on growth globally. We expect this, in addition to factors domestically (such as a slow-down in construction activity) to show through this reporting season.
In an environment where growth is looking challenged, we stay focused on identifying and investing in companies that can deliver resilient growth over the medium to long term, at a sensible price.