David Jane
Premier Miton Macro Thematic Multi Asset Team
Kick off to the season
Earnings season is starting, which will give markets something tangible to get their teeth into. The Christmas and New Year period is generally one of low liquidity and news flow. The market really gets going once the earnings season kicks off. This is likely to be particularly so this year, as there seems to be a huge disconnect between macro forecasters’ expectations of a material mean reversion in company profitability, versus stock analyst expectations of further growth.
Macro forecasters and the bond markets are expecting economic and profits contraction. Individual stocks analysts, generally following companies’ guidance, are expecting continued expansion. While we are unlikely to get a definitive answer, we must surely get greater clarity.
More important than earnings results themselves are likely to be company outlook statements. Earnings are backward looking and there will be information in these about companies and sectors that do well or badly. Outlook statements more accurately reflect the state of play in the here and now.
Feeling under pressure?
Key factors in this earnings season are likely to be the impact of cost pressures on margins, such as labour shortages, wage growth and raw material inflation. Margins have expanded greatly overall since the lockdown era, and these must now be under pressure from the above factors.
At the top end of the profit statement, the revenue outlook might also be under pressure. There is plenty of evidence of a slowdown in certain areas. Rate rises are already having an impact on the consumer sector. Mortgage rates have already had a material impact on housing markets. Used car prices are falling rapidly. This is the mechanism by which rate rises are meant to work to reduce inflation, by reducing final demand.
How this feeds through to other areas of consumer spending is unclear. With employment remaining strong most consumers are in great shape unless they need to move house. That slowdown is maybe yet to come.
Passing the market leadership baton
While the consumer sector is especially important for the US economy, last year earnings growth at the energy companies was a major driver of overall profit growth. With oil prices flat to down, profit growth here is not likely to be as strong. However, other sectors may take up the running. Base metals prices have been strong and demand is picking up because of China reopening and energy infrastructure investment.
Industrials have also recently been performing strongly, partly on the reshoring and deglobalization argument. These factors are unlikely to be impacting current profitability however, cost pressures here must also be an issue.
Outside the US, in Europe and Japan, we would expect to see early indications of any economic slowdown. These economies are generally seen as more sensitive to economic condition than the more resilient and consumer focused US.
We remain cautious going into this period, but also we think it should provide better clarity on the industries that will perform best over the coming year and those that will struggle. However the market performs overall, there are always winners and losers.
