THE Q2 reporting season formally kicked off in the US recently. Despite the economic "soft patch", analysts are expecting another solid quarter of revenue and earnings growth - plausibly, in our view.
Higher oil and commodity prices will be a theme, despite recent declines – but not necessarily in the expected direction.
For sure, some companies will report pressure on margins from input costs: we saw Carnival report a 20% year-on-year fall in EPS to end-May last week, largely due to higher fuel costs.
Others will have fared better. FedEx reported a 30% increase to end-May thanks partly to its ability to manage such costs, and the large resources groups, of course, will likely have seen earnings boosted.
Events in Japan should also continue to be a focus. While only a small percentage of its companies cited a negative impact on supply chains in Q1, for industrials the figure was around 25%. We see a continuation of this issue for those companies sensitive to the autos and electrical equipment markets.
The softer developed-world economy means that exposure to faster-growing emerging economies may be another theme. Q1 US earnings overall were much stronger than expected, despite local GDP growing by just 1.9% annualised.
In terms of top-line growth, investors are looking for a healthy 11$ year-on-year increase in the US, making it the fifth consecutive quarter of double-digit revenue growth. European revenue estimates for Q2 are lower, at 6%, but still solid.
Looking to earnings, current expectations are for 18% and 17% growth for US and Europe respectively. This would mark the seventh straight quarter of double- digit earnings growth for both regions.
At a sector level, 9 out of 10 US sectors are predicted to see an improvement in earnings (six of which should see double-digit growth) driven by companies in the energy and materials sector. Utilities are expected to report lower earnings year on year.
Estimates generally have actually nudged higher since the start of the quarter as increases in energy (14.9%) and utilities (6.1%) more than offset reductions in Consumer Discretionary (-2.8%) and healthcare (-2%). More generally, we believe outlooks will remain conservative with managements reaffirming their 2011 guidance. In our view, developed equities are not pricing in even this modest outlook, and reiterate our overweight stance on developed market equities.
We noted in June that the US was starting to enjoy an edge over Continental Europe in our regional preferences. By local standards it looks equally inexpensive, but its relative earnings momentum continues to improve, helped perhaps by a very competitive dollar.
We have added a little to the already overweight position, and trimmed that for Europe.
:: Andrew Miller is regional director of Barclays Wealth in Newcastle
