HSBC’s Esty Dwek ponders the impact of earnings on markets
Esty Dwek, investment strategist at HSBC Private Bank has analysed why earnings have had such a strong impact on markets.
While the earnings season was seen as the main market driver, we believe that the economic picture was the real reason for moves in investor sentiment in the past few weeks. Indeed, sentiment seemed to be impacted by companies citing growth concerns as the reason for weaker earnings results, and recent better US and Chinese data has already improved sentiment. As a result, we remain constructive on equities and look at dips as opportunities to add to our positions.
It has been some time since the earnings season has been the main driver of markets, as political and macroeconomic developments have had a much stronger impact in recent years. We expect this brief trend to end soon though, with the spotlight increasingly shifting to the US election and the fiscal cliff debate. Further, while rather disappointing results have weighed on sentiment, we continue to believe that aggressive Western central bank actions will act as a backstop for markets. Nonetheless, we look at what this earnings season is telling us, and what this means for markets going forward.
Earnings: it’s still about the economy
In the past few weeks, with a rather light calendar, earnings results took centre stage, with some notable disappointments, which initially weighed on markets. However, on the whole the results themselves weren’t that bad, as earnings growth was mostly in line with expectations, even if revenue was slightly weaker than expected. In our view, the disappointment was more driven by what the lacklustre announcements and profits warnings represent, i.e. concerns about the global economic slowdown. Indeed, many companies cited external factors, in particular the worse-than-expected slowdown in Europe and in China, as the main reason for their cautious outlook. In the US, the domestic sales picture was actually relatively resilient, supported by the improvement in the housing market and improving consumer confidence, although some concern about the fiscal cliff debate may be delaying capital spending plans for the time being.
The negative perception surrounding the earnings seasons was further exacerbated by some mega caps names disappointing. These included the biggest technology companies Apple, Google, and Microsoft. With some of the largest companies disappointing in terms of earnings, share prices in most cases reacted negatively. This had a sharp impact on the major indices, which exaggerated the impact on investor sentiment.
Coupled with some lingering uncertainty ahead of the US election and fiscal cliff, and with markets still waiting for Spain to request European aid, risk appetite has suffered. Nonetheless, in recent days sentiment has improved, largely driven by better-than expected US and Chinese economic data releases that point to a recovery in growth, albeit a gradual one.