IT'S unlikely anyone needs reminding about equity market volatility - many investors remain on edge due to ongoing macro-economic and political concerns on both sides of the Atlantic.
However, corporate earnings strength has often been cited as a reason to not only stay invested but also add more to your investment portfolio. Hence, we’ve been anxiously awaiting the latest corporate earnings results.
The third quarter earnings season kicked off earlier this week, with US aluminium giant Alcoa reporting results on Tuesday. A handful of other firms have since made announcements, but the real action will take place during the next fortnight when the bulk of reports will flow.
So far, analysts’ estimates of earnings growth for 2011 have taken different paths in Europe relative to everywhere else. In the US, forecast earnings growth is essentially flat on the year, with forecasts for the UK being slightly lower.
In Europe, expectations of earnings growth have fallen from a peak of 22% to a barely positive figure now, with fears over the debt problems in Europe the likely explanation.
Not only have these fears precipitated a more cautious economic growth outlook across the region, they’ve also caused banks to face elevated liquidity and solvency concerns. Generally speaking, European firms are much more dependent on the banking system for funding (compared to US firms who tend to raise a greater proportion of capital via fixed-income markets). So, with European banks tending to their own problems, they’ve been less able to support the wider economy, and earnings forecasts have borne the brunt.
On the other side of the Atlantic, the trickle of results from S&P 500 firms has so far been encouraging. As of last week, 33 firms had reported Q3 earnings, with as many as 23 beating analysts’ expectations. The relative proportion of positive, neutral and negative surprises has so far mirrored that seen over the same quarter in 2010. While this is positive, we can’t draw a firm conclusion yet from such a small sample.
In addition to the unveiling of actual Q3 earnings figures, significant focus will also be on management comments about the outlook for their businesses. S&P 500 year-on-year 2012 consensus earnings growth is currently forecast to be 14%. This strikes us as a little high side, so we’ll be listening carefully to managements’ view of the world. Actually, we think a good dose of reality from the men on the ground may prove to be a good thing at this point in time.
With so much bad news about the macro economy and ongoing political wrangling, you could be forgiven for assuming corporate earnings will disappoint. However, while PMIs may have fallen sharply, other indicators have proven more resilient. However, we do expect cautious 2012 outlooks from management. In particular, we look for sensibility around profit margins and hope to get an idea of how ongoing public policy debate may have had a real impact upon business confidence.
:: Andrew Miller is regional office head at Barclays Wealth in Newcastle
