US corporate earnings remain strong, even though some high-flying names announce negative surprises.By 30 July, 267 S&P 500 companies had reported earnings for Q2 18. Despite Facebook’s profit warning, the Q2 reporting season in the US was good, with around 60% of S&P 500 companies significantly beating top-line and bottom-line expectations.Positive surprises in the US were higher in Q1 (66% for sales and 61% for net income), the first quarterly results to reflect Trump’s tax cuts of end-December, but the deceleration is modest and Q2 is turning out to be another good one for US corporate results.If average sales surprises have improved since Q1, that is not the case for net income surprises, which have declined. Data excluding financials shows an even greater deceleration in net income
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US corporate earnings remain strong, even though some high-flying names announce negative surprises.
By 30 July, 267 S&P 500 companies had reported earnings for Q2 18. Despite Facebook’s profit warning, the Q2 reporting season in the US was good, with around 60% of S&P 500 companies significantly beating top-line and bottom-line expectations.
Positive surprises in the US were higher in Q1 (66% for sales and 61% for net income), the first quarterly results to reflect Trump’s tax cuts of end-December, but the deceleration is modest and Q2 is turning out to be another good one for US corporate results.
If average sales surprises have improved since Q1, that is not the case for net income surprises, which have declined. Data excluding financials shows an even greater deceleration in net income surprises. Most of the margin disappointment is coming from the US technology sector. Yet dispersion inside the tech sector has been high, with Facebook reporting net income that was almost 15% below expectations while sales were in line with forecasts.
The reporting season has not been as good so far in Europe, where the average negative surprise has reached around – 3% for net income and -0.8% for sales. The reporting season in Europe has been even worse excluding financials,
While Europe has avoided the tech sector disappointments seen in the US, European equities have not managed to bridge the performance gap with the US, with the earnings outlook for European indexes this year looking just average. Equity valuations are still rich but far from extreme levels reached early January. Volatility has eased without falling into complacency. Some more equity upside remains likely this summer. At end-July, the 12-month forward price/earnings ratio (PE) stood at 16.2x for the S&P 500 and 14.1x for the Stoxx Europe 600. Adjusting for sector differences, Europe offers no discount relative to the US— indeed, Europe currently commands a slight premium.
Overall, despite some clouds, the reporting season in the US remains supportive. Valuations are high but not extreme and the risk environment has improved, meaning that the summer rally could extend further. Any concerns are clustered in Europe, where the earnings outlook is not as supportive as in the US.
