Update on the global corporate earnings season
With roughly half of the world’s companies having reported second-quarter (Q2) results, profits after tax and revenues have risen 16% and 3% respectively from the previous quarter, convincingly beating expectations. Profits have now increased for six consecutive quarters, while revenues have risen for the past four.
The persistent growth in sales clearly suggests that the recovery in corporate profit has not been due to cost cutting alone, and that consumers around the globe are increasing their spending. Although it is possible to increase overall revenue by slashing prices and thereby boosting sales volumes, this would tend to reduce profit margins (assuming input costs remain the same). In fact, profit margins in the US have steadily increased from 2.1% in Q4 2009 to a current 9.6%, well above the 6% longterm average. While we believe margins are likely to return to the average, this would still be consistent with good earnings growth.
Outside the US, the timeliness of reporting varies considerably. While UK earnings have been the poorest among the key world economies, with earnings declining an average 16% from Q1 to Q2, this is more a case of timing than an underlying trend. Only 21% of the market has reported and this includes the beleaguered oil giant BP, which comprises 6% of the FTSE 100 Index. There are also some large companies such as Vodafone that have not reported yet, which could considerably influence the aggregate performance. Earnings and sales in Europe, the US and Latin America have been strong, while sales in Japan are down 8%. Japan’s weak results are not due to one poor performer, but a general decline in sales, raising doubts about corporate health in the region.
From a sector perspective, earnings declines have centred on utilities, which are facing regulatory issues and seeing their margins squeezed as they struggle to pass on rising input costs from higher commodity prices. However, sectors representing the largest proportion of the market, namely banks, industrials, oil & gas and information technology, have all posted positive results.
The results seen across the globe so far have beaten analysts’ forecasts by about 11%, and in the US earnings have outpaced expectations for 6 consecutive quarters. Beating expectations is typical following a recession, and historically has tended to last between 6-8 quarters. After this period, earnings tend to be much more in line with consensus forecasts. From this point of view the ‘earnings beats’ are not that surprising, but they still tend to provide support to the market.
Of the companies that have given an outlook for earnings and sales for the coming quarter, along with their quarterly results, two thirds have been positive. While management guidance should be kept at arms length, we are encouraged by the positive trend. Generally upbeat outlooks reinforce our view that the global economy will not experience a double dip, despite some lacklustre economic data.
Disclaimer
Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority. Coutts & Co is registered in England No. 36695. Registered office: 440 Strand, London WC2R 0QS.
The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.
The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.
The analysis contained in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.
Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies.
None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.
