For immediate release: 27 October 2015
Winding back the clock
Rowan Dartington Signature’s Guy Stephens on the corporate earnings season - Selective exposure
to equity markets provides the best opportunity to outperform
Global economic growth concerns dominated financial markets throughout August and much of
September. Since then however, equity markets seem to have found a new lease of life.
Having, on several occasions, fallen down to levels not seen since 2012, the FTSE 100 now sits almost
10% higher than its recent low of 5,898 in August. This bounce has been even more pronounced in
the US where the S&P 500 now stands 13% higher over the same period.
Have the concerns that caused the summer setback been resolved? Almost certainly not! China was
undoubtedly the trigger and fears of economic slowdown have, if anything, spread beyond that of
the Asian nation since then, as investors consider the knock-on effects of such a significant economy
falling over. This was enough to dissuade the Federal Reserve from what seemed like an inevitable
September rate rise and, six weeks on, it seems unlikely that view will have changed when Yellen
and co reconvene this week. A large portion of the market’s recent leg-up has been due to the more
accommodative stance of some central banks, namely the US, Europe and China.
With all eyes drawn to the ever evolving macroeconomic environment at present, company
fundamentals have once again been playing second fiddle. So let’s consider the current corporate
earnings season which has crept somewhat under the radar during this time, relative to previous
quarters.
Tech stocks have been some of the biggest winners so far. Google, Amazon and Microsoft have all
posted strong third quarter revenue and earnings figures and the performance of the tech sector has
responded in kind. Apple is still due to report, this week. Outside of tech, those sensitive to a rise in
consumer spending look to have fared well. McDonald’s, the world’s biggest restaurant chain by
sales, increased its quarterly sales for the first time since 2013.
Caterpillar group meanwhile, so often seen as a bellwether for the strength of the global economy,
reported a sharp drop in quarterly net profit and reined in its outlook for 2016, as global activity
remains weak in construction, mining and oil and gas. These sectors unsurprisingly remain distressed
given the question mark that has been placed over Chinese demand.
Manufacturing companies have also been feeling the squeeze, particularly exporters who face the
added headwind of US Dollar strength which remains significant. With other central banks loosening
policy, September’s delayed rate rise offered little in the way of respite for the strength of the
Dollar.
So there are clearly some notable sector divergences in terms of underlying earnings and in terms of
market performance. By-and-large, market sentiment appears to be in a much happier place than it
has been for the last two months. The market bounce has though primarily been an expansion of
valuation multiples, back to the more elevated levels that we had become accustomed to recently,
prior to August’s setback. This increases the pressure on underlying earnings to keep pace in the face
of some intimidating headwinds.
This all sounds somewhat familiar to the challenges faced by markets before growth concerns shot
to the forefront, although perhaps with a slightly higher sense of instability in the wake of those
events. We believe, more than ever, that the benefits of being carefully selective with your exposure
to equity markets provide the best opportunity to outperform.