Markets return their gaze to corporate earnings

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As the concerns about Greece fade into the background, the quarterly corporate earnings have resumed their traditional role as market drivers.

Corporate earnings were not the only interesting news last week Ben Steinebach Ben Steinebach Head of Investment Strategy

Most of the companies announcing their Q2 results to investors last week were European. In the Netherlands Heineken, ING, DSM, Fugro, SBM Offshore and other companies presented a mixed bag of earnings last week. Heineken’s strong results were rewarded on Monday as investors drove the stock up by around 5.5%. Although ING’s figures contained few surprises, investors saw an opportunity after the past year’s strong performance, and profit-taking depressed the stock by 3.5% on Wednesday. DSM’s results were largely disregarded by the market. Fugro and SBM showed mixed results, though it is evident that the oil services industry is experiencing difficulties while oil prices remain low.

The earnings season so far

In the United States around 440 of the S&P 500 list have reported their earnings. About three quarters of them outperformed their projections. Significantly fewer companies achieved the projected revenues. The recent appreciation of the US dollar was a recurring explanation. US pharmaceutical companies in particular announced strong earnings this season.

Most European companies have now also presented their results. On average they too mostly outperformed the profit forecasts and, as in the United States, pharma was one of the best performing industries. Europe’s revenue data were slightly better than in the United States, which is not unusual. Where many US companies have been hit by the strong dollar, their European counterparts are often profiting from the weaker euro and improving their export positions. In terms of revenue, Europe’s outperformers outnumbered the underperformers.

Investors and the Fed looking at employment

Corporate earnings were not the only interesting news last week. Investors as well as the Fed anxiously awaited data about employment in the United Staten. The data released by payroll processor ADP last Wednesday fell short of expectations. The weekly unemployment aid applications on Thursday only differed marginally from the projected numbers. The most important information came on Friday afternoon (after the deadline for this publication). That number, the official monthly employment figure, has particular bearing on the timing of the Fed’s first interest rate hike. The question is whether ‘bad news’ is in fact ‘good news’: will investors be happy with poor figures (underperforming employment growth) that push back the first rate hike?

We feel that this should not be the case. Although we still expect the Fed to introduce its first rate hike in September, we do not believe that this will cause problems. Firstly, the Fed has spent months preparing the market for a rate hike, and secondly we believe that, with inflation currently very low, the rate hike will be introduced cautiously and gradually. However, the most important reason why rate hikes are not likely to create any problems is that they will take place against a backdrop of ongoing economic recovery.

What to expect this week

The earnings season is slowly winding down. This week should still see Delta Lloyd, Prudential, Corbion, Aalberts, Aegon, Cisco and Nestlé announce their earnings. Macroeconomic news to look forward to this week includes, from the US, retail sales, industrial output, capacity utilisation and consumer confidence as measured by the University of Michigan. All these numbers will be announced late in the week (retail sales on Thursday, the rest on Friday).

In Germany the important ZEW index will be published this week (on Tuesday). In Europe, toward the end of the week (Friday) data will be announced about economic growth in the eurozone (as well as in various individual countries, including the Netherlands). This week’s news from China will include retail sales and data about industrial output (both on Wednesday).

Leo A. de Jong, deputising for Ben Steinebach

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