A clutch of investors warn that earnings season in the US and Europe could disappoint.
Analysts estimate companies listed on Wall Street’s S&P 500 will report 6 per cent year on year earnings growth for the second quarter, according to a survey by data providers IBES and Refinitiv. For the third quarter of this year, the rate of growth will rise to 11%.
Forecasts for Europe’s Stoxx 600 share index are even rosier, with analysts overall predicting 22 per cent earnings growth for the second quarter — in part because of the gauge’s heavier weighting of energy companies. The growth rate is expected increase to 29% in the third quarter.
Some investors are skeptical of these projections. They point to the inconsistency between the progress companies have led analysts to anticipate and a macroeconomic picture. This is clouded by high inflation and business surveys that suggest that Europe and the US are heading for recession.
“We’re going to be seeing earnings downgrades, no doubt about that,” said Neil Birrell, chief investment officer at asset manager Premier Milton Investors. The consensus of analysts’ estimates, Birrell added, “looks like they are in cloud cuckoo land.”
Grace Peters, head of European equity strategy at JPMorgan’s private bank, added that corporate management teams will probably “start to admit” business conditions are deteriorating as the latest earnings season gets under way.
Purchasing managers’ indices, which collate executives’ responses to survey questions on topics such as business volumes and new orders and tend to predict how analysts’ expectations will move, have been pointing south. A PMI for the global manufacturing sector, produced by JPMorgan and S&P Global,June saw a 22-month low.
“Usually when business confidence drops, analysts downgrade [earnings forecasts] and they haven’t been doing that as much as you’d normally expect,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.
The FTSE All World index of developed and emerging market shares has fallen more than a fifth so far in 2022, with the S&P 500 down by the same amount and Europe’s Stoxx 600 off 16 per cent. Some investment strategists warn that earnings downgrades are not yet fully priced into stock market prices.
US equities are the “most vulnerable to earnings disappointment,” strategist at Oxford Economics wrote in a research note. “Margins are stretched [and] cost pressures are broad based,” they wrote.
The Wall Street Quarterly Earnings Season was initiated by Morgan Stanley, JPMorgan, and BlackRock in the United States. missing analysts’ forecasts.
Emmanuel Cau, Barclays’ head of European equity strategy, expects the Stoxx 600 to fall to about 380 points, from around 410 currently, if economic conditions unfold as the bank predicts and Russia cuts gas supplies in retaliation for Western support of Ukraine.
“Europe will be in a recession by the turn of the year,” Cau said, predicting that the consensus of analysts’ forecasts for 2023 will gradually change from 5 per cent earnings growth currently to a 5 per cent decline.
“At face value, equities are cheaper than they were six months ago,” Cau said. “But they are trading on earnings expectations that are too high. The valuations are misleading.”
