Investment Viewpoint: key themes from earnings season

Written by Bernard Swords, Chief Investment Officer, and Elizabeth Geoghegan, Head of Fixed Income Strategy

19 February 2024

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Bernard Swords, Chief Investment Officer 

How is the earnings season unfolding in your view? 

  • Let’s start with the positives, profits are back growing year-on-year. In the US, earnings growth is running at 5% (if you exclude the energy sector, it’s 8%) and Europe is also seeing growth if we exclude the energy sector.
  • There is not a large difference in earnings growth between the US and Europe if you exclude the energy sector (8% vs 6%).
  • There is however quite a different story at the sales level: in the US, sales growth is 4% while there is none in Europe. Some of this is due to the difference in the performance of local economies but the sectoral make-up is also a factor. The US has a much larger exposure to the ‘new economy’ companies and sectors. Communication Services is seeing profit growth of 40%, IT earnings are up 15% and Consumer Discretionary is seeing profit growth of 30%.
  • This shows that earnings growth is quite concentrated. In the US, only four sectors are seeing profit growth in excess of the market average, while the number falls to three for Europe. In previous editions of Investment Viewpoint, I’ve mentioned the concentrated nature of equity market performance, but a good portion of this is down to the concentrated nature of earnings performance.
  • It’s not all good news. In our year ahead outlook, we stated that we were concerned that profit forecasts for the next couple of years seemed too high and that equity markets could struggle as these forecasts were adjusted downwards. During this reporting season, more companies have cut guidance than increased it – a feature we have only seen in times of recession. Meanwhile, there have been few adjustments made to analysts’ forecasts. So, there is still downward pressure on earnings expectations for 2024 and 2025 – and that keeps us in a cautious mode.

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

How did fixed income markets fare last week – and what is driving moves in US fixed income markets this month? 

  • It was a relatively quiet week for fixed income markets. Bund yields trended higher again, on the back of increases in US Treasury yields. US Treasury yields have been moving higher month to date as investors re-establish rate cut expectations following recent firmer inflation data releases and better economic data. So far this month, the move higher in yields has been greater in the US relative to Europe, somewhat reversing the trend seen in January whereby European fixed income underperformed relative to the US. 
  • Unlike in January where the European bonds underperformed due to a significantly overexcited rate cut expectations, the moves in the US fixed income markets this month have been driven by sobering expectations but also better inflation prints. In addition to this, the economic picture in Europe is a lot weaker relative to the US, and this diverging growth picture is feeding through to economic forecasts. 
  • Outside of fixed income, the growing optimism for US growth is also being expressed in FX markets whereby the EURUSD is now trading at around $1.08, having reached the lowest close since early November in the middle of the week.

The week ahead: what to watch out for

The minutes from the last policy meetings of the ECB and the Federal Reserve will be released and will give further colour to the thoughts of the central banks. The main releases from the euro area will be sentiment indicators both business (PMIs) and consumer confidence – so, we’re hoping to see some signs of life in the region’s economy. Results season continues with more Industrial companies reporting this week. The highlight will be NVIDIA, not only for what it will say about its own performance but also about the AI theme.

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