Mark Lister: Will earnings live up to expectations?

The United States reporting season has just begun. Photo / Getty Images

COMMENT:

The US reporting season has just kicked off, and over the next few weeks we'll get an insight into how the world's largest companies are performing.

I find myself saying every reporting season is a crucial one, but it really does feel like this period is even more important than usual.

Corporates across the world are facing numerous headwinds, including ongoing supply chain issues, cost pressures, labour shortages, and rising interest rates. Shares are well down from their highs and there is growing talk of recession.

For the June quarter, markets are expecting aggregate S&P 500 earnings to have increased by 4-5 per cent, relative to the same quarter a year ago.

Unsurprisingly, the energy sector is expected to see the strongest gains, on the back of higher oil prices. Oil averaged close to US$110 a barrel during the quarter, well above the US$65 average in the three months ending June 2021.

At the other end of the spectrum, financials are expected to fare the worst.

As always, it will be the commentary about what's ahead that gets the bulk of the attention. Like many parts of the world, the US economy has been robust in recent months, but there are signs of waning activity which points to weakness on the horizon.

US corporate earnings are expected to increase by a healthy 10.8 per cent this calendar year, and by another 9.1 per cent in 2023.

Despite the talk of a slowdown, these forecasts haven't changed much since the beginning of the year. In fact, earnings estimates have been revised slightly higher for both years.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. Photo / Supplied

That seems odd, given we have a longer list of things to worry about today than we did in January. Since then, the Ukraine War, surging inflation, and more rapid interest rates hikes have all conspired to dampen the outlook.

Against that backdrop, you'd think analysts would've taken the knife to their profit forecasts.

The currency will be an added headwind for some. During the June quarter, the US Dollar Index was 5.9 per cent higher (on average) than it was during the previous three months, and 12.7 per cent above the June 2021 quarter.

This is likely to weigh on US exporters, particularly sectors with a large proportion of international revenues, such as technology with 58 per cent, materials with 56 per cent and consumer staples with 45 per cent.

A revenue hit on the back of currency moves doesn't point to any fundamental problems with a business. However, it can still dent margins and profitability, making for weaker headlines and a less positive market reaction.

We'll learn a lot about how the rest of the year is shaping up in these next few weeks, that's for sure.

Company management teams have better visibility than most about where activity is headed and how consumers are feeling. These assessments shape their investment and hiring decisions, which then feed into the broader outlook.

History suggests it should be another solid earnings season. According to FactSet, the earnings growth rate in the US has beaten analyst estimates in 39 of the past 40 quarters, with the only exception being March 2020 when the pandemic first hit.

It could be a little tougher this time around, and even if that record stays intact, it's the observations about the future that markets will pay the most attention to.

Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.