Speed read
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The fourth-quarter earnings season is well under way. In the US, for instance, some 70% of S&P 500 companies have now reported their figures. How is it turning out?
“Earnings have been good enough not to hinder the positive sentiment in stock markets,” says Robeco Chief Strategist Ronald Doeswijk.
Let’s look at the numbers in more detail. In the US, 67% of companies have beaten the consensus estimate for revenues. In aggregate terms, companies beat expectations by 2 percentage points. As for earnings, 75% of companies have surprised on the upside. So far, the aggregate positive surprise has been 5 percentage points.
European earnings are well behind US
In Europe, the reporting season is still in its early days. There, only 40% of companies have reported their earnings so far.
But it is clear that European companies are not doing as well as their US counterparts. On revenues, 59% of the companies that have reported have beaten expectations. On average, though, the numbers were in line with expectations: the aggregate surprise was 0%. And although 51% of companies beat earnings expectations, in aggregate the reported numbers were 14% below consensus. Not so impressive.
The Q4 2012 earnings season in numbers
There hasn’t been much to get excited about from Japan, either. Sales there were in line with expectations, while earnings have surprised a bit on the positive side.
Three key takeaways
Doeswijk has three key takeaways from the numbers so far. First, analysts have again played their usual game of catch-up, moderating their initially over-optimistic expectations. “In general, analysts have made enough downward revisions to end up with realistic earnings estimates,” he says.
Second, earnings data from the US have been the best relative to consensus. “That is in line with the relatively good performance of the US economy,” notes Doeswijk.
Third, as we have already seen, earnings have come through just strong enough not to damage the positive sentiment that is buoying up stock markets.
Positive sentiment can be sustained—for now
In fact, Doeswijk feels that sentiment could well remain positive a while longer. On the one hand, markets are reasoning that negative economic surprises would provoke further quantitative easing. On the other, they seem to believe that positive surprises, which are unlikely, would not hurt as long as growth does not strengthen to a rate that pushes up inflation rapidly.
The question is how long this phenomenon can be sustained. Doeswijk points to a scenario in which sentiment remains positive through April and reality kicks in afterwards. In other words, Doeswijk believes the situation is primed for the historical “sell-in-May” pattern to emerge.
What could spoil the party?
There are plenty of candidates to act as a wake-up call. It could be renewed worries about the eurozone after the German federal elections, for instance. Or investors could be spooked if there are no signs that earnings growth is picking up. After all, it has been roughly flat for almost a year now.
The prospects in this area are not that promising. “For 2013, we are expecting low single-digit earnings growth,” says Doeswijk. This compares with bottom-up estimated earnings growth of 11%. That’s just not realistic, he thinks. “We thus expect downward earnings revisions to continue throughout 2013,” he says.
Where are the drivers for sustained equity market performance?
Without robust earnings growth, what can push equities on to sustained performance? Doeswijk points out that one positive from last year, relief after a crisis is contained, is unlikely to be repeated. “We believe that the reduced risk of a eurozone break-up was an important driver of equity markets last year,” he says. But now, with the VIX index at only 12 and most of the major worries having been taken care of at least temporarily, there is limited upside potential from this source.
As for valuation, Doeswijk says “at least it is not a big worry”. He estimates that global stock markets are overvalued by around 15%, with a current Shiller P/E of 19x against a normative Shiller P/E of 16.5x.
That leaves abundant cheap central-bank funding as the main support. But Doeswijk doesn’t think it can do the heavy lifting by itself. “We find it hard to imagine that cheap money alone will be enough to push up equity markets by another 15% in 2013,” he says.
