Half-term report!

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Half-term report!

As we reach the summer heights companies commenced releasing their latest set of financial accounts. Investors eagerly anticipate the quarterly results for insights into levels of corporate well-being.

Whilst earnings and sales will capture the headlines and analysts will scrutinise the accounts for signs of creative accounting. Investors will also look to verify valuations and seek out forward guidance. What we know at this point is that 172 out of the 500 US companies in the S&P 500 index have reported results so far. We also know that expectations for a good outcome have grown. This is clearly illustrated by the chart below. For this current quarter the estimate for earnings growth is a whopping 20%.

Profit levels this time follow on from impressive first quarter results, when earnings growth soared by 25%, surpassing the 17.1% expectation set by analysts.

Earnings growth this year is being supported by loose monetary conditions and new fiscal policies such as tax cuts which have energised the US economy. The relationship between growth in the economy and profits growth is a loose one because of many different factors at play. However, since Q3 2016 corporate profits and economic growth have tracked well together showing central bank policy and government policy are delivering positive effects.

S&P 500 Earnings Growth: Estimate vs Actual and US GDP (YoY)

Source: Factset, July 2018

Of the companies that have reported, 89% (153 out of the 172) have beaten earnings expectations; Technology, Financials, Health Care and Industrials are all doing particularly well.

If we go a little deeper there are some standout performers. As in the previous quarter, Goldman Sachs released impressive results. Profits surged 40% to $2.57bn in Q2, exceeding analysts’ estimates. Profits at Goldmans flowed from better-than-expected top line growth with revenues from their major businesses, with the exception of trading, all improving. Interestingly, the windfall from the tax reform enacted by Donald Trump, which reduced the bank’s effective tax rate for the first quarter to 17.2% from 22%, has now increased to 19.4%.This may be a first sign that the tax windfall may be starting to fade, but can still deliver good outcomes.

Other noticeable strong performers included Alphabet (commonly known as Google), which logged a 26% gain in second quarter revenues, something which may well have been missed amongst the headlines surrounding Facebook and Netflix. Harley Davidson, a firm caught up in the trade turmoil, topped Wall Street’s quarterly earnings estimates and their share’s rallied 9% after the company results. This has given hope that future profits will hold up better than expected despite the tariff obstacles.

Results so far have been encouraging but there is still a lot to be absorbed as more companies release results and issue forward-guidance. Once we have a complete picture of corporate earnings we will update you with more insight into profit margins across a broad swathe of corporate America with analysts looking for signs that they may be peaking.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

Global Markets