US Q3 earnings season has now started. JP Morgan and Citi have beaten expectations, while Goldman Sachs has disappointed. We’ll also see Netflix, IBM and Coca-Cola reporting this week. With US stocks down over the past three months, broad positive earnings surprises would be welcome. Companies have been guiding the market lower with EPS for Q3 expected to be lower than Q2. So the bar for positive surprises is quite low, right?
In fact, the ability for US companies to engineer positive surprises is impressive. In the 1990s, only a net 20% of US companies reported positive surprises. In the 2000s, this figure rose to 45%. And this decade, 50% of companies reported positive surprises over those that reported negative surprises. Given this bias, we’d need to see a very significant proportion of US companies reporting positive surprises for it to move US stocks higher…
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
US Q3 earnings season has now started. JP Morgan and Citi have beaten expectations, while Goldman Sachs has disappointed. We’ll also see Netflix, IBM and Coca-Cola reporting this week. With US stocks down over the past three months, broad positive earnings surprises would be welcome. Companies have been guiding the market lower with EPS for Q3 expected to be lower than Q2. So the bar for positive surprises is quite low, right?
In fact, the ability for US companies to engineer positive surprises is impressive. In the 1990s, only a net 20% of US companies reported positive surprises. In the 2000s, this figure rose to 45%. And this decade, 50% of companies reported positive surprises over those that reported negative surprises. Given this bias, we’d need to see a very significant proportion of US companies reporting positive surprises for it to move US stocks higher.
The larger question is whether US equities are still the best destination for investors. It worked well last year, when US equities clearly outperformed most other regions – no doubt, helped by US tax cuts. This year, Euro-area stocks are just about outperforming US equities (see second chart) and Chinese stocks are clearly outperforming. We’ve also seen US yields come down versus Euro-area yields, which again suggests that 2018 was the peak in US growth outperformance.
Bottom Line
Earning season will be an important period for US stocks. Many companies will beat expectations, but the scale of beats will need to be high for markets to care. More importantly, US stocks are starting to lose their lustre compared to other countries. The trade war and US election risk don’t help. Companies’ guidance on future earnings may also be vague as a result. Meanwhile, Euro-area stocks are perhaps the more interesting market and could see them outperforming the US. It helps that many are pessimistic on the region’s growth prospects, so the scope for upside surprises is high.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)