Global Weekly: US earnings are cruising

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Over the past week, equity market performance has been mixed. Although first-quarter earnings are generally encouraging and, for the moment, geopolitical tensions with regards to trade tariffs and the Middle East have moved to the background, the MSCI World Index traded sideways. At the same time, European equity markets have been outperforming the US, which might be counterintuitive when looking at the earnings season’s results.

The US earnings season is further underway than Europe’s. And, although not completely finished, we observe that earnings strength, in terms of both growth and positive surprises, are significantly better in the US than in Europe. The US is cruising at clear double-digit earnings growth and a significant number of companies with positive surprises, while Europe is only just reaching low to mid-single digit earnings growth levels; and there is only a limited number of companies with results that are better than expected. We believe this development is largely explained by US earnings having been helped by the Trump tax reforms and by a larger exposure to fast-growing technology companies in the US. Meanwhile, European earnings were clearly hampered by currency headwinds, with the euro strengthening more than 10% over the past year. We expect that in the coming quarters the difference between the US and Europe will narrow, as we believe the euro peaked in the first quarter.

On a company level, the results from Apple were in the spotlight this week. The results were clearly not as bad as had been feared. The market was definitely relieved when Apple provided a positive full-year guidance, while also announcing a share buyback program worth USD 100 billion.

Inflation creeps up in the US

Despite an increase in core inflation in the US, as measured by personal consumption expenditure, and with inflation approaching the 2% target level of the Federal Reserve, the US central bank maintained its path for increasing interest rates. While market reaction remains muted, there was a small decrease on the shorter part of the US yield curve, while the longer part of the yield curve remained roughly unchanged. In short, there was a slight steepening of the curve. (The US yield curve measures the spread between short- and long-term debt issued by the US government.)

In Europe, the inability of a coalition government to be formed in Italy,  has been announced by the winners of the last election. While new elections appear the only way to solve the issue and recent polls signal an increase of votes for populist movements, market reaction remains subdued. There was a less than 6 basis points increase in Italian government bond ten-year yields relative to the German Bund yield.