With forecast growth at its highest level since 2011, we look at why the next batch of US results is relevant for many UK investors
Thursday 19 Apr 2018 Author: Tom Sieber

As we write the US first quarter corporate earnings season is in full swing. Whereas in the UK most companies report results just twice a year, US firms report in full once a quarter.

This has attracted some criticism on the basis it leads to too great a focus on short-term performance among investors and, more crucially, management teams.

Short-term expectations this time are high. Overall analysts at New York-based investment strategist CFRA expect a 16.3% advance in earnings in the first quarter. This would represent the most significant growth since 2011.

WHY ARE EXPECTATIONS SO ELEVATED?

President Donald Trump signed a bill in December which lowered US corporation tax from 35% to 21%. This should boost the bottom line at companies with material US operations. The economic picture also remains supportive.

‘Strong current profit growth is largely a reflection of favourable economic conditions,’ says investment bank UBS.

‘Healthy business confidence and still-low financing costs are boosting business spending on investments and labour. In turn, this is boosting consumer confidence and driving consistent gains in consumer spending.’

However, stock market volatility and tensions over trade between the US, China and to a lesser extent Mexico could see forward guidance from US firms disappoint.

Management, looking to massage expectations, may reach for these macro-economic factors as they look to lower the bar for earnings releases in the remainder of the year.

WHAT HAS HAPPENED SO FAR?

Against the high expectations there has been an uncertain start with big US banks Citigroup, JP Morgan Chase and Wells Fargo all disappointing investors to a greater or lesser extent.

This reflected uncertain messaging on the outlook, the fact that profit increases had already been priced in to their stock valuations ahead of time, and JP Morgan CEO Jamie Dimon’s comment that ‘the environment is intensely competitive and lending was flat for the quarter’.

WHY IS THIS IMPORTANT FOR UK INVESTORS?

The US is by some distance the largest and most liquid market in the world and as such tends to set the tone for other global exchanges.

Listed in the US are global leaders in several different industry sectors, with household names like Facebook, Coca-Cola and Apple all present and correct.

Many UK investors will have exposure to US stocks through funds or exchange-traded funds even if they do not invest across the pond directly.

Finally, because many UK companies do not report on a quarterly basis or, if they do, typically report later, investors look for clues in US companies’ earnings on how their UK-listed counterparts might be faring.

WHO’S REPORTING WHEN AND WHAT’S THE READ-ACROSS TO UK STOCKS?

Next week sees the peak of the reporting season. Read on to discover the industry leaders which are scheduled to update the stock market.

For three key examples we show the earnings per share forecast and relevant London-listed businesses which are either competitors or suppliers to these US titans. (TS)

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