- Equities in their second-longest bull market since WWII
- Sentiment is at its strongest for many years
- Companies must deliver to justify lofty valuation levels
- Weaker euro means European companies should perform well
- We focus on BlackRock, JPMorgan Chase and Bank of America
IT, financials and energy should surprise to the upside. Images: Shutterstock
By Peter Garnry
Global equity markets are in their second longest bull market since WWII and sentiment is at its strongest for many years. Corporate earnings have improved dramatically since the bottom in oil prices 20 months ago. Equity valuations in the MSCI World Index are in the 91% percentile measured over the past 23 years so companies have to deliver during earnings season to justify the lofty valuation levels. Q3 earnings season starting next week will be no different.
Setting the stage
Operating earnings (EBITDA) have recovered the most in the MSCI ACWI indicating that emerging market companies have seen strong growth as commodity markets have improved and the USD has weakened, thus easing financial conditions.
European companies' aggregate earnings are around the highest since the Great Financial Crisis but still significantly below their record highs from early 2008. Given the tailwind from the weaker EUR on a year-on-year basis we expect European companies to do well again this quarter.
Among sectors we believe IT, financials and energy will surprise to the upside and deliver strong earnings growth. The energy sector in particular has bounced back over the past four earnings seasons through a combination of deep operating cuts and higher oil prices.
Next week is a light week with only 25 earnings releases in the global equity universe of 2,000 stocks that we cover. The first week is always dominated by US financials.
- Reports Q3 earnings on Wednesday at 10:30 GMT
- Consensus is looking for EPS $5.53 up 7.5% y/y and sales $3.1B up 9% y/y
- The biggest growth driver continues to the ETF franchise still gaining market share
- The Technology business segment has been a strong growth driver the past couple of years
- Latest signs show healthy inflow into alternatives which could add a bit to margins in Q3
- The stock scores negative on all equity factors except volatility. Overall score is negative in our quant model
- Reports Q3 earnings on Thursday at 10:45 GMT
- Consensus is looking for EPS $1.66 up 4% y/y and net revenue $25.6B up 1% y/y
- Jefferies Group recently reported weak trading numbers so we do not expect a great quarter for the capital markets segment
- Commercial banking division is expected to do well as the US economy continues to expand and employment rising including more housing starts
- The stock scores high on momentum and volatility factor which means that the stock has outperformed global peers lately and with a lower volatility. Overall score is negative.
Bank of America
- Reports Q3 earnings on Friday at 10:45 GMT
- Consensus is looking for EPS $0.46 up 9% y/y and net revenue of $22B flat y/y
- Focus will be on return on capital still lagging peers. With good US macro momentum BofA should be able to improve return on capital
- The bank has positive sensitivity to rate hikes so any guidance on profitability given Fed's trajectory will be watched closely
- Stock scores negative across all equity factors, expect momentum highlighting outperformance against global peers. Overall score is negative.
In general the theme is expensive US financials compared to peers. Our quant model finds more value among European and Chinese banks.
As the chart below shows the three stocks have outperformed S&P 500 since early September driven by positive macro surprises and Fed's guidance of quantitative tapering and higher Fed Funds Rate. Especially performance the past week indicates potential repositioning ahead of earnings season with larger institutional investors betting on strong quarter.
Below are the other most important earnings releases next week including their estimates on earnings and sales.
Source: Saxo Bank, company earnings reports.
– Edited by Clare MacCarthy
Peter Garnry is head of equity strategy at Saxo Bank