Global investors braced for impact of US earnings season

After a rollercoaster ride in 2018, the next big test for global sharemarkets is likely to be the quarterly US earnings season.

This will begin in two weeks and continue through early February.

One silver lining of the recent selloff is that valuations look a lot less frothy.

The S&P 500 index in the US is now trading on a price to earnings ratio of around 14.5, having fallen below both its five and 10-year average as prices have declined.

On the face of it, the market is starting to look quite reasonable. However, that’s only the case if earnings estimates for the coming 12 months can be trusted.

If, as some commentators are suggesting, we are too complacent about the prospects for a US recession in the near future, those estimates could prove optimistic.

On the other hand, should the US market be able to deliver the 7-8 per cent earnings growth analysts are predicting for the 2019 calendar year, current valuations don’t look too bad.

For most investors, last year was fairly miserable.

The S&P 500 fell 6.2 per cent, the first negative year since 2015 and the worst performance in a decade.

December was a particularly ugly month, with the index down 9.2 per cent, the worst month since February 2009.

The S&P 500 finished the year 14.5 per cent below the record closing high from September, having been down 19.8 per cent at one point last month, which put the US market within a whisker of being categorised as an official bear market (defined as a 20 per cent drop from the peak).

The local market held up much better, with the NZX 50 ending 2018 up 4.9 per cent. This was still the most subdued annual performance since 2011, mind you, and is below the average since 2001 of 8.7 per cent.

Australian shares couldn’t manage a gain like we did, but they fared better than many other markets, slipping just 2.8 per cent.

Commodities had an even rougher ride, with oil falling 24.2 per cent over the year as prices collapsed 40 per cent during the final three months.

Dairy prices slipped six per cent, while gold suffered its first annual decline in three years.

The focus will soon turn to earnings.

Last year was very strong in this regard, with aggregate earnings from US shares increasing by more than 20 per cent on the previous year.

The one-off impact of tax reform was a major driver, but even without that growth was probably still in the 12-13 per cent range, which is not too shabby at all.

As the US reporting season kicks off later this month, forecasts suggest annual growth of 12 per cent this quarter (down from estimates of almost 17 per cent before the sell-off began).

That would make for the fifth consecutive quarter of double-digit earnings growth, which could be supportive for a market that’s been under all sorts of pressure.

Areas of focus will include the negative impacts of a stronger US dollar and rising cost pressures, but the positive offset (for most businesses) of lower oil prices.

Comments on what multinationals are seeing on the global growth front will be of interest, as will any mention of tariffs and how they are affecting companies.

Share prices are ultimately driven by the earnings they generate, and with the uncertain backdrop we’re facing at the moment, this could be where the rubber hits the road for investors in 2019. Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.