back GO BACK


Earnings are growing, why worry?

20 July 2018

Companies across the developed world are reporting their earnings for the second quarter, and forecasts for the rest of the year and, so far, many are backing up Chris’s observations.

As of yesterday, JP Morgan reported:

Consensus estimates for 2018 and 2019 earnings per share growth
Source: IBES, JP Morgan, 19-Jul-2018 2018e EPS Growth, % 2019e EPS Growth, %
Area Index Current Jan ’18 Current Jan ’18
Developed World MSCI World 15.6% 10.0% 9.2% 9.6%
US S&P500 22.3% 12.3% 10.1% 10.3%
Europe (inc. UK) Stoxx600 8.1% 9.2% 8.8% 8.8%
Eurozone EuroStoxx 6.9% 9.4% 9.8% 9.6%
UK FTSE100 11.3% 7.0% 6.4% 7.0%
Japan (year to end of March 19 + 20) Topix 4.2% 8.7% 8.9% 8.6%
Emerging Markets (MSCI) EM 15.6% 13.1% 11.4% 11.1%

“So far” means we’ve only had 10% of the US companies that are due to report, 15% in Europe and 8% in Japan. There’s a lot to come but the tone is definitely set fair.

Developed-world equity markets have been rising, with the US continuing to dominate the leaderboard. The strength of growth means that price-to-earnings ratios have remained within recent ranges, with Factset’s US index (similar to the S&P500) P/E ratio at 17.19 on a next-12-month basis. That’s the same as it was on 19th April but the rise in actual and forecasted earnings means that the index has returned 5%.

Sam points out, in his article on what the equity index price charts might portend, that cooling sentiment towards equities and other risk assets may mean investors have been building up spare cash rather than investing. That could mean there are few sellers even if news appears relatively bad. If the newsflow were to suggest global risks are reducing or even just not worsening, equity markets could push on further during the summer.

The news about current corporate earnings is good but investors worldwide are being given quite a bit to worry about. The three current themes show no sign of taking a holiday.

Today’s Trump-CNBC interview saw the Chinese being threatened with tariffs on all US-bound exports. At the start of the week, the US identified $200bn in goods which may be targeted for tariffs, giving a total of $250bn. Anything further, Mr. Trump has said, depends on the extent to which China retaliates.

When asked during Friday’s interview, “Will you ever get to 500, though?” Trump responded that he is “ready to go to 500,” referring to the approximate total dollar value of Chinese goods exported to the US last year.

During the week, financial commentators have noted the weakness of Chinese equities and currency, usually inferring that it’s down to trade issues.

The weekly has covered China regularly in the past few months and regular readers will be familiar with our view that the trade spat is getting more heated perhaps because of China’s weakness rather than the other way around. The time to pressure an opponent is as they weaken.

There’s been a really large number of actions by the Chinese authorities in the past 48 hours, with suspected currency intervention happening overnight. Perceptions of authority ineffectiveness appear to be growing much as they did in late 2015. Isaac notes in his article below, weak systems are not fixed by strong control from the top.

And then there’s the UK. There was a BBC Radio 4 program last night (“The Briefing Room – What does the UK want from the EU?”) which made the case that the Conservative Party is moving from pragmatism to ideology quickly, and that a no-deal scenario is becoming more likely.

Readers will have differing views about the impacts that this might have. We have come to the view that UK companies are currently faring quite well, and earnings growth is robust. The uncertainty that politics has introduced has caused domestic UK stocks to embed a reasonable risk premium over the long-term. There is a lot of risk, but the pay-out compensates enough for us to warrant a neutral holding.

Meanwhile, Trump’s comments today about rising US interest rates suggest that the Federal Reserve Open Market Committee may face interference. Below is an article about “the next crisis”, written before his comments. Suffice it to say, in comparison to the UK, we think the markets have been unduly sanguine about the medium-term risks that President Trump poses to US domestic markets.