Investment Matters

US reporting season

Apple grabbed the headlines late last week – reaching a US$1 trillion market cap.  That’s US$1,000,000,000,000.  It came after its quarterly results topped expectations.  (To give some context, ExxonMobil + Johnson& Johnson + Walmart combined are still smaller than Apple.)  And Apple was certainly consistent with the overall theme of the recent US reporting season, for quarterly results ending 30-Jun-18.

As Australia’s reporting season gets underway, we look at the US reporting season – and any read-throughs for Australia.

A good quarter

By this week the majority of large US companies had released their Jun-18 quarterly results.  And overall it has been a great quarter.  Tax cuts, a strong US economy and share buybacks (when assessed on a per share basis) have contributed a >20% increase in year-on-year earnings growth.

81% of S&P500 companies had released results as at 3-Aug-18, and 80% of those have reported a positive EPS surprise (i.e. beating consensus estimates) - by an average of 4.9%.  Sales (revenue) have also beaten estimates, by an average of 1.4%. (All data in this paragraph sourced from FactSet.)

Big tech

The big tech companies were in the headlines.  The background to this was the meteoric rise in their share prices over 2017 and 2018:

Source: Yahoo! Finance, Nasdaq.com, First Samuel

The share prices of those who disappointed – Facebook, Twitter and Netflix – were crushed, as can be seen above.  The remainder continued on their merry way up.

Valuation

The US market (S&P500) is on a forward P/E of around 17.7x (source: Bloomberg).  With more strong earnings expected, certainly in the short term, this P/E is actually considered more sustainable than Australia’s forward P/E of 16.2x (source: Bloomberg).

Translating to Australia

There are some things we expect to translate to Australia’s reporting season over the coming month:

  1. High-value stocks can have big falls.  Facebook is a prime example.  High P/E stocks which disappoint are likely to face considerable share price pressure.  (You don’t own any high P/E stocks.)
  2. We expect companies with earnings generated overseas to do well – benefiting from generally strong economic growth overseas, and US tax cuts (if they have a US exposure).  Domestically focused firms, especially with a consumer focus, are likely to suffer the malaise of the Australian economy.  This excludes those with specific positive circumstances, such as energy companies (AGL being a case in point).