Earnings Season Underway
A number of companies across the world reported third quarter earnings this week, kicking off the Q3 earnings season for companies across the world. Expect lots of individual stocks and even broader stock markets to move around over the next 4-6 weeks in response to companies’ financial updates!
This week was positive overall with a number of large companies reporting earnings that were better than expected, but things hang in the balance as there were also some which underperformed relative to expectations. For those of you keen to know more about the individual movers and shakers, we’ve provided some of the standout names towards the bottom of this email! 🤓
Why Expectations Matter
If you’ve ever noticed earnings reports being measured versus analyst and investor expectations, and wondered why that was the case - we’ve got you covered below.
- The Rationale:
- Ahead of an earnings reporting period, companies tend to provide guidance on how their business is doing, and along with that rough indications of how much revenue and earnings they expect to generate in the coming quarter.
- Analysts and investors take this information away and update their thinking to come up with expectations of what a company’s value should be - presumably the people best placed to give you an idea of how the company is doing are the people who are responsible for running the company!
- Share prices consequently adjust to reflect the latest set of expectations.
- The next major update comes from the company when it files its earnings report - where the company’s actual financial statements are made available for all to see.
Going into an earnings reporting event, expectations matter because they usually drive the share price to wherever it might be ahead of the report. Once the report is published, share prices move if the result is significantly different from what had been expected by investors / analysts.
- The Q3 2019 Earnings Season
- With that in mind, going into the latest earnings season, expectations have been set fairly low - with data compiled by FactSet showing average expectations of a 4.6% decline in Q3 2019 earnings versus the same period last year for S&P500 companies overall.
- That’s a pretty low base - these timid expectations set a lower earnings bar for companies to metaphorically jump over.
- Something worth remembering when companies you follow outperform versus consensus estimates but see relatively modest share price increases! And it might be even more important to bear in mind if companies you follow miss the low-bar of expectations and see share prices plummet in the aftermath 😰
Looking Ahead to Next Week
The pace of earnings releases will ramp up from next week, with more than 250 large cap companies around the world due to report their latest financials. We’ve picked a few of the largest potential market movers out for you below.
Notable US companies will include:
Amazon, AT&T, Boeing, Coca Cola, Comcast, Google, Intel, McDonalds, Microsoft, Procter & Gamble.
Notable European companies will include:
AB-InBev, AstraZeneca, BASF, Daimler, Eni, Iberdrola, Novartis, SAP, Reckitt Benckiser.
Bonus: Let’s zoom out for a minute
Earnings season is just one (pretty important) part of the broader puzzle here.
It’s sometimes also helpful to contextualise this information with respect to other forces at play, so we’ve listed the major themes below, with at least one or more theme likely having some kind of impact on the stocks you’re following.
- What’s Helping Global Financial Markets:
- De-escalation of US-China trade tensions
- Global monetary policy pivot - central bankers are looking at reducing interest rates and other options again in order to provide stimulus to the slowing global economy
- Increased recognition of the need for fiscal policy to play a bigger role - the IMF has been making the point again this week
- A seemingly strong US labor market and US consumer confidence
- Positioning/sentiment - following recent market declines (remember 2 weeks ago when everyone was running for the hills screaming recession?), there’s a case to be made that stocks are trading relatively cheap right now. That is, if you aren’t too worried by the following...
- What’s hurting Global Financial Markets:
- Global growth slowdown - this is the big one. In recent weeks we’ve seen slowing manufacturing and investment in the US and China, and signs of a creaking European economy too
- Uncertainty around next steps in the US-China trade war - this is clearly having an impact on the levels of manufacturing and investment being made by companies - a key driver of the above mentioned global growth slowdown.
- Skepticism about ability of monetary policy to counter trade and structural headwinds - can central banks really help boost the economy and all its perceived problems simply by cutting interest rates and printing more money? Time will tell.
As always, we’ll be watching! 🍿🥤