Don’t be too impressed by earnings “beats”

DWS | Quarterly earnings are down year-on-year and 2020 forecasts are being cut further. It’s hope that is driving markets for now.

As the quarter ends investors will naturally find that many of their questions have been answered. And yet a big one remains: were the figures really good enough to justify the strong stock-price moves of recent weeks?

The good news is that companies are not complaining that the macro and political situation has worsened. Nor have politicians created any fresh uncertainties. But there isn’t any talk of a noticeable turnaround either. And though politicians have not made trade and other tensions worse, they have not solved the disputes either. Quantitatively there is also scope for interpretation – depending on how the comparisons are made. Compared to the previous year, the profits of U.S. companies fell by 1.9%. That’s not so good. But compared to expectations? It’s hard to say, since these have regularly been revised down in the run-up to reporting. This helps to explain the many positive “beats”. Annual profits may have been down, but 80% of S&P 500 companies again surpassed themselves.

How little this achievement means can be seen in the further earnings revisions for 2019 and 2020. As our “Chart of the Week” shows, global earnings estimates have fallen by over 13% compared to the estimates of a year ago, and by 8.6% for the S&P 500. In cyclical, export-oriented markets such as the German one (Dax) and emerging markets, consensus estimates have fallen still further. Yet, as the chart also shows, this disappointment has not affected stock prices at all.

Why? For one thing, despite the earnings revisions, consensus is still expecting an earnings jump of around 10% for the S&P 500 for 2020 compared to 2019 earnings. We forecast only 4%. Another factor is that the reporting season does not take place in a vacuum. Compared to the beginning of the year, central banks are much more expansive, many leading indicators are no longer in free fall, and the atmosphere in the U.S.-Chinese tariff dispute seems to be a little more conciliatory. European cars might also be spared U.S. customs duties. Is all that enough to justify the optimism?

“Earnings estimates have been revised down for over a year now, with almost frightening consistency. The reporting season has not changed this, the 2020 estimates are being further reduced. This is not the basis for a sustained stock-market rally,” says Thomas Bucher, DWS equity strategist..