Market Comment: The earnings season has started – three things to look for

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Strong economic growth in the developed countries and most emerging markets, high consumer confidence and strong business sentiment indicators have set a good framework for the first-quarter earnings season that just kicked off. What are we looking for as the earnings season unfolds?

Earnings expectations: setting the bar too high?

Since recording started, we never had such strong earnings revisions at the begin of a calendar year. For the S&P 500 Index, data provider Reuters expects first-quarter earnings to grow by around 18% (year-on-year). For the full year, Reuters expects earnings to grow by nearly 20%. The question is: is there any room left for upside surprises or is the bar set too high?

How strong is the business cycle?

The start of the season has been promising. US banks like Citigroup, JPMorgan and Bank of America reported strong results on the back of economic growth and positive effects from lower taxes. Uncertainty in equity markets has increased over the past few months. Will a positive earnings news flow help to raise investor confidence in the strength of the business cycle?

The tech sector: beyond the Facebook scandal

Encouraging company results in the technology sector might prompt investors to shift their attention from the Facebook scandal towards tech companies’ earnings strength and high margin power. Netflix published very upbeat results this week: the provider of streaming video reported strong subscriber growth and high revenue growth. Next week, several major tech players, including Facebook, Amazon and Google parent Alphabet, will release quarterly results.

Overall, we expect the earnings season to be strong. Our current equity stance is supported by the conviction that economic and company fundamentals remain solid for now. Encouraging corporate earnings and forecasts could therefore be a confirmation of our modestly positive view on equities.