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Investors are being hard to please despite a decent showing in latest results season
Thursday 11 Nov 2021 Author: Mark Gardner

Research by the Morgan Stanley strategy team reveals that European third quarter earnings are on target to exceed consensus analyst forecasts. This should trigger a series of earnings upgrades which in theory provides support to equity markets.

However, the response from the market to third quarters numbers has been decidedly lukewarm. This suggests that investors expected companies to exceed forecasts and only a significant beat to estimates was enough to push up share prices.

The bank says 55% of companies in Europe have beaten third quarter earnings per share estimates, while 23% have missed so far, giving a net beat of 32%.

It says companies that missed earnings per share expectations underperformed the market by 1.6% on the day of results on average, whereas those beating expectations saw their share price broadly flat in relative terms.

From a sector perspective, the strongest breadth of beats has been observed for financials and energy among European stocks. Conversely, industrials and communication services have recorded the narrowest breadth of beats. Commodities stocks have been punished if they missed their earnings per share forecasts.

For the US market, asset manager Unigestion says approximately three quarters of firms in the S&P 500 index have so far reported third quarter results and of these 83% have beaten earnings estimates. More than 90% of technology companies delivered better earnings than forecast. Overall, the same theme was seen in the US as in Europe, with investors hard to please.

‘Market action suggests investors have not been so impressed by third quarter results and other drivers are pushing equity markets higher,’ says Unigestion. However, the asset manager says the backdrop is still positive for equities.

‘Earnings season has largely confirmed our expectations: firm revenue and profitability remain very strong, and though supply/labour bottlenecks are likely to continue to be a drag for the foreseeable future, healthy demand provides sufficient support to equity markets,’ it comments.

‘The (latest) Fed meeting also confirmed that the world’s key central bank will remain patient and continue to provide ample liquidity to markets until the middle of next year.’

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