Curmi & Partners

Economic weakness weighs on U.S. and European Corporate Earnings

By Simon Gauci Borda

With the third quarter of the financial year behind us, earnings season is in full swing on both sides of the Atlantic as public companies prepare to release their financial results covering the months from July to September. Investors eagerly anticipate the release of financial results from one quarter to the next as these results are used to gauge both the health of the overall economy and that of the individual companies.

Overall, while investor sentiment is somewhat subdued given the global economic backdrop and the never ending flow of negative economic news, it is safe to say that investors are not too overly optimistic on third quarter results. However, market participants are expecting U.S. companies to fare more favourably when compared to their European counterparts due to the perceived robustness and resilience of the American economy. Given this scenario of expected stock market weakness, earlier this week investors have flocked to safe haven assets as risky assets such as the main European stock indices traded in negative territory while less risky assets such as European and U.S. Government bonds saw their yields drop further with Gold also trading in positive territory.

While the vast majority of American public companies that have so far reported their third quarter results have beaten analyst expectations, the S&P500, an index composed of the largest five hundred publicly listed companies in the U.S., did not replicate the positive company earnings to the same extent. The S&P500 only climbed by 2.44% since the beginning of October and stood at 2,995.99 at the time of writing and just shy of its all time high of 3,025.86 which occurred earlier this year during the month of July.

Following the publication of their results, Netflix Inc., Snap Inc. and Lockheed Martin managed to beat analyst forecasts while Texas Instruments Inc. and McDonalds Corporation disappointed analysts as they missed market estimates during the third quarter. Caterpillar Inc, which is known to be a bell weather stock as it is a good barometer on the health of the global economy, posted a decline in quarterly profits and disappointed the market as demand for its products has weakened due to the ongoing U.S.-China trade negotiations.

While the jury is still out on the European stock market as the majority of European public companies have yet to report their third quarter earnings later on this month, with some even opting to release their next set of results at the beginning of next year, those that did have fared well. SAP SE, the German software company, ASML Holding NV, which operates within the semiconductor industry, and LVMH which operates within the luxury goods industry, all beat market expectations.

However, given the positive set of results published so far, the EuroStoxx50 index, which is comprised of the largest fifty companies within the Eurozone, would have been expected to react more positively as it rallied by just 1.46% since the beginning of October. One can only assess the performance of the European stock market as a whole once the remaining companies publish their numbers.

On a forward looking basis, the projections for both the European and American stock markets are pointing towards a correction as the futures market, the market by which investors are able to purchase financial instruments at a predetermined price and future date, is indicating that investors are not so optimistic on a continuing rise in stock markets.

The negativity towards future stock market values is being driven by the expected weakness in economic conditions that are set to materialise within the coming year. The rationale is that deterioration in the economic climate will in turn negatively affect corporate earnings which to a large extent influences the value of publicly traded companies.

Economists are forecasting that GDP growth within the U.S. and Eurozone is expected to weaken if the current spat between the world’s two largest economies drags on. Moreover, the departure of the U.K. from the European Union together with the economic slowdown in the German and Chinese economies are all indicators that perhaps the global stock markets are in for a tough time.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.