NN IP: US earnings will bounce back in H2
Patrick Moonen, principal strategist Multi-Asset at NN Investment Partners expects US earnings to bounce back to +5.1% in Q3 and +10% in Q4 this year, despite the unexceptional Q1 earnings results. It expects earnings to be down -2.6% in Q2.
We are not worried and believe the Q1 headwinds will fade going forward. It is not surprising that against a mixed earnings backdrop, equity markets have difficulties moving higher, especially as there are plenty of other sources of uncertainty.
At some point, fundamentals will become more dominant again for markets. Once that happens, they are likely to appreciate that downside risks to the global economy have abated in recent months. DM labour markets have remained strong and household income, wealth and sentiment trends continue to point to ongoing resilience in DM consumption demand. This is especially important as tentative indications are emerging that the tide is turning for global manufacturing and trade.”
NN IP has increased its exposure to cyclicals in the US, which have started to outperform their defensive counterparts.
Cyclicals are being supported by a number of supportive factors. First, there are more encouraging signs that the macro-economic outlook is improving. Financial conditions are easing, bank lending growth has picked up and economic fears regarding China have abated. Next, the turn in industrial commodity prices has helped cyclicals. Energy is up 50% from the bottom and steel and iron ore prices have risen sharply.
Also, while investors have focused more on fixed income in their current search for yield, if inflation and interest rates rise in the US then interest could switch to equities more with valuations playing a bigger role. Cyclical sectors currently quote at a considerable discount. Finally, with the exception of the energy sector, earnings momentum for cyclical sectors has improved, although it is still in negative territory.