Market Comment: Earnings season wrap up: US outpaces Europe

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The second-quarter earnings season was strong, particularly in the US. Jan Wirken, ABN AMRO equity analyst, explains how trade war fears dampened share prices, despite good results.

With over 90% of the S&P 500 Index and over 80% of the STOXX Europe 600 Index companies having reported their financial results for the second-quarter of 2018, it is now possible to draw some conclusions.

For the most part, companies beat analyst expectations regarding sales and earnings. A portion of the companies also raised their guidance for the full year. Nevertheless, investors did not reward the good news with an increase in share prices. The average one-day share price reaction in Europe was nil, while in the US it was an increase of just 0.4%. This is no surprise, given looming trade war fears. 

Recent trade news is that Donald Trump is considering imposing tariffs of 25% (instead of 10%) on USD 200 billion of imported goods from China. While this threat might seem to be a vigorous escalation of the US trade conflict with China, we believe that the newly proposed tariffs will likely never go into effect. The US president has a track record of threats , followed by a handshake and a sudden outbreak of friendship and mutual understanding. There are already ample examples of this behaviour, including Trump's relationship with North Korea, his Nafta partners and Jean-Claude Juncker, where a promised increase in soya purchases by the EU was enough to offset Trump’s German auto tariff threats. We therefore continue to believe that the ratcheting up of tensions with China by the US president is a negotiation ploy. 

Strong earnings in the US; less so in Europe

One of the headlines from the US earnings season was the disappointing performance of Facebook and Twitter, which led some to conclude that the information technology (IT) sector was weak. But, in fact, overall the technology sector did well. More than 90% of all technology companies beat their earnings-per-share guidance, due to healthy sales and strong demand growth. Energy was the worst-performing sector, where only half of oil & gas companies beat analysts' estimates. This was mainly due to the oil equipment & services industry. This segment continues to suffer from the conservative investment plans of oil & gas producers, brought on by the low oil prices of the last three years. 

In Europe, just a little more than 50% of companies did better than expected. The materials and IT sectors were the best performing in terms of beating consensus estimates. The weakest sector was telecoms. 

Based on sector performance in the second quarter, it is not possible to deduce that we are near the end of the bull market. This is typically signalled by a shift from growth sectors performing well to defensive sectors taking the lead. Defensive sectors, such as consumer staples, health care, utilities and telecoms, have revenues tied to basic needs and are therefore less sensitive to economic conditions. But, defensive sectors are not yet outperforming the market, at least according to second-quarter earnings results.

Conclusion

As the earnings season winds up, the facts show that, in general, company quarterly results were good. Stock markets continue to be supported by solid global growth and low, but gradually rising, interest rates. Unemployment in the US is low and it is declining in Europe. We therefore remain positive regarding the outlook for stocks, with a preference for the US over Europe and emerging markets.

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