Global Earnings – Open For Business

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Aneeka Gupta (WisdomTree) | The current earnings season sheds plenty of light on the outlook for global equity markets. This time last year, the world was thrown into disarray owing to the COVID-19 pandemic. Since then, we have seen lockdowns lifted as vaccination rollouts gather pace. In addition, the gradual resumption of economic activity, stimulative global fiscal plans, and the release of pent-up consumer demand are being reflected in first-quarter earnings results. As a result, the breadth of earnings revisions has been strongest in the US, followed by Japan, Europe while Emerging Markets and China are turning more neutral.

US earnings exceed expectations but margin pressure ahead

US first-quarter earnings have been exceptional, to say the least. Earnings Per Share (EPS) growth is tracking a 46% increase compared to pre-season growth expectations of 24%. Financials and Discretionary sectors are leading the gains. Energy has reversed into a gain from an expected year-on-year decline, helped by higher oil prices this year. First-quarter sales are expected to increase 8.9% versus consensus estimates of 6.1%. Materials, Discretionary, Technology and communications sectors are on track to post double-digit sales growth among the 71.4% of companies reported so far. Amid a strong first-quarter earnings report, forward-looking EPS estimates are being revised upwards led by financials, energy, materials and communication sectors. We caution that while the outlook for earnings remains strong, there are risks on the horizon emanating from the proposal of higher corporate taxes, which are central to the Biden Administration’s proposed infrastructure package. In addition, the combination of slower revenue growth coupled with rising costs could squeeze margins unless corporations are willing to pass on the costs are passed on to the end consumer.

A strong but expected beat in Europe

European companies on the broad EuroStoxx 600 Index are heading for their best earnings season. First-quarter results in Europe tracked so far point to a decisive headline beat with weighted earnings at 25%, currently well ahead of expectations. In addition, there has been a very large breadth of Earnings Per Share (EPS) beats compared to the prior quarter last year, marking the broadest beat since 2009. Despite the record rate of beats, price reaction on the day of results has been negative, which suggests most of the good news is already priced in. The breadth of sales beats has been narrower, the shortfall was evident in the energy and utilities sector that suffered due to weak demand during lockdowns. Europe is the only region where earnings revisions are still higher than sales revisions, suggesting fewer signs of margin pressure than in other regions in the current period. 

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.