US earnings boom. But not translating to share prices.
It has been a quite exceptional company reporting season in the US. In a positive way. [US companies report quarterly, with the majority now having released their results for the period ending 31-Mar-18.]
The graph above from Deutsche Bank shows consensus earnings outlooks have been stepping up materially as reporting season progressed – more significantly than in recent years.
Around 80% of companies that have reported to date have reported number's that have exceeded analyst expectations.
Earnings growth is also very strong: 26% above the same quarter last year, with revenue growth a major contributor to this (i.e. cost cutting is not the driver of bottom line profit performance as it was in some recent periods).
Share price response
Typically, earnings growth translates into share price growth, though not perfectly correlated in the short term. But this reporting season has been notable for the stark contrast between strong earnings growth, and a decline in the overall market.
This is the S&P500 Index graph since the release of Alcoa’s result (the unofficial commencement of quarterly reporting season).
Source: IRESS, First Samuel
It is impossible to specifically identify why. But some of the factors that may be contributing are:
The US market was a bit 'toppy' before reporting season commenced. Market corrections are not the only way such situations resolve themselves – sometimes it is as mundane as markets taking a breather while the earnings line of valuations increases
There is concern that both inflation and interest rates are rising in the US, which is a negative for the market’s outlook and valuation
There is commentary that this reporting season may represent the top of the earnings cycle
There are economic and other uncertainties in the US, everything from geopolitical to the US government deficit (including the impact of the Trump tax cuts), which are weighing on the market