Global Weekly: Earnings season starts up

News item -

Over the past week, equity markets performance was mixed. Although underlying fundamentals are generally encouraging, geopolitical tensions with regards to trade tariffs are still lurking in the background. The second-quarter earnings season is now underway, which offers investors the opportunity to see how companies are doing and where earnings and expectations around earnings are heading. Although it is still early days for the earnings season, it appears that the US is again off to a good start, whereas Europe, so far, is mixed.

The market is anticipating that the US will show a materially higher earnings growth rate than Europe. For the US, the market has pencilled-in close to 20% earnings-per-share (EPS) growth, while expectations for Europe is 'only' around 9%. US earnings momentum is partly helped by the tax relief effects that have been implemented by the Trump administration. Excluding these effects, the EPS growth rate would be around 10%.

The European growth rate, on the other hand, is helped by a strong revival in energy earnings. When adjusted for that impact, the underlying growth rate in Europe would be around 5%. In other words, the US is anticipated to show double the growth rate of Europe. This is obviously partly reflecting the higher US economic growth, which is one of the reasons that we currently favour US over European stocks.

On a company level, the results from US banks where the first eye-catchers, as were IBM and ASML. Based on IBM and ASML, one could conclude that momentum in the technology sector is still going strong, with solid results coming in. Results for US banks have so far shown that the sector is on solid footing, but momentum is gradually easing. This resulted in a mixed reception to the results. In general, we believe that the next few weeks will be decisive for market direction. Company results and the guidance they provide will be heavily scrutinised.

German Bund yields remain anchored

During the week, in contrast to the rest of the month, there was a positive net offering in the primary market for European government bonds. There were new issuance from Germany, Spain and France totalling around EUR 17 billion. Given a rising volume of maturities ahead, net supply should turn negative again soon. It is expected that the European Central Bank will reinvest these backflows from its bond portfolio, which will create some demand during the traditionally less liquid summer period.

Disappointing European core inflation data released on Wednesday further diminished the market’s interest rate hike and inflation expectations, thereby limiting the threat of rising yields as well. The escalation of the trade dispute as well as concerns about the Italian political situation, which choked risk appetite during the first half of the year, are still influencing investors. Risk premiums in the eurozone periphery, emerging markets and corporate bonds are still high compared to the start of the year, even though some relief was seen since the end of June. As long as political risks remain, demand for quality will likely remain robust.

On the other hand, Bund yields are still trading at comparably low levels and the potential for another rally seems unlikely. During the last 18 months, yields could not remain below 30 basis points. Consequently, Bund yields will likely remain in a tight yield range.