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High hopes for US earnings season but markets may stall

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Analysts and fund managers expect the upcoming US quarterly earnings season to be the strongest in some years, but with US equities already trading at highly elevated levels, few expect results to translate into higher sharemarket growth.

Expectations for the US earnings season are high. Analysts at Goldman Sachs’ expect blended earnings-per-share growth of 9.2 per cent this earnings season – the strongest since the fourth quarter of 2011.

Analysts and fund managers expect the upcoming US quarterly earnings season to be the strongest in some years, but with ... Analysts and fund managers expect the upcoming US quarterly earnings season to be the strongest in some years, but with US equities already trading at highly elevated levels, few expect it to translate into even higher sharemarket growth. Photo: AP

Of early reporting companies whose quarter ended at the end of February, 74 per cent have beaten earnings-per-share forecasts, according to Bank of America.

Financial firms – which benefit from the Fed’s lifting of interest rates – are expected to do particularly well. Citi and JP Morgan, who reported last week, both handily beat analysts expectations, while Wells Fargo’s shares slid after revenue narrowly missed consensus expectations.

Meanwhile, industrials and companies aligned with the energy market are expected to profit from a rise in the oil price.

Much of the higher growth has already been priced in, Wingate Asset Management chief investment officer Chad Padowitz said, adding that makes it likely that higher profits won’t translate to sharemarket growth.

The S&P500, which contains the largest and most influential companies on the world’s most important stockmarket has enjoyed a charmed run of late, rising 8.5 per cent since the November election of US President Donald Trump.

Of major markets, US stocks are the most highly valued in the world, trading at earnings multiples of around 17.6 per cent of 2018 forward earnings, according to JP Morgan Asset Management. That compares to 15.1 times earnings in Europe and 13.9 times earnings in Japan.

Most analysts and fund managers do not place the strong sharemarket performance solely at the feet of the US president. The US economy has greatly improved in the past year, and this has fed through to the stock market.

While President Trump was elected on expectations of undertaking economic stimulus, few of his plans have yet been implemented. US Treasury Secretary Steve Mnunchin said in an interview with the Financial Times on Monday that getting tax cuts through by August is “not realistic at this point”.

This hasn’t dampened expectations of strong corporate earnings growth. But there are potential pitfalls for investors.

“If anything, the risk is that, with current valuations, it doesn’t take much to bring it down a bit if things aren’t as positive as people hope,” Mr Padowitz said.

The interesting thing to watch, he added, will be how earnings season will answer the growing divergence between ‘soft’ and ‘hard’ US economic data.

“A lot of the ‘hard’ economic data – the actual numbers on what’s happened – is less positive than the soft data, which is things like consumer surveys, confidence surveys and the like. The gap’s quite wide. This earnings season might be a time when companies re-base expectations in line with the hard data, bringing optimism back a little bit.”

“The forward forecasts will be very relevant to whether things pick up and grow from here. The data’s been very mixed.”

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