The Wall Street sign is visible outside the New York Stock Exchange (NYSE) in New York on February 16, 2021.
Brendan McDermid | Reuters
LONDON – The corporate earnings season got off to a flying start, but positive surprises so far have failed to generate upward momentum for global equity markets.
As of Friday morning, 13% of companies in Europe and 20% in the US had reported earnings for the first quarter, with the majority exceeding consensus expectations.
Barclays analysts on Friday pointed out that earnings per share (EPS) growth has been particularly strong so far, at 107% yoy in Europe and 63% in the US.
EPS beats are above average for a reporting season at 74% in Europe and 83% in the US, Barclays noted, while sales growth surprised positively compared to the 1% consensus in Europe and the US. 4% in the United States. all the European financials that have so far provided positive earnings per share are surprising.
However, both the European and US markets were down slightly during the week, and Barclays Head of European Equity Strategy Emmanuel Cau suggested that high earnings expectations were largely discounted in the markets following their impressive run and appreciation in the week. last year.
“Our view that the relationship season could turn out to be a case of ‘travel and arrival’ appears to have continued so far,” Cau said in the statement.
“The reaction of the median stock price to results is actually negative despite strong beats to estimates, mainly in the US, while it is broadly flat in Europe.”
Cau noted that a similar pattern had emerged in the previous two earnings seasons, with equity markets bouncing back in the previous period before crashing and starting to recover after a period of digestion.
Marcus Morris-Eyton, portfolio manager at Allianz Global Investors, told CNBC on Thursday that the earnings season should be strong due to “very favorable macro buoyancy winds” and that these are likely to continue for the next few quarters, particularly in Europe. .
“But the challenge for us investors is that expectations are very high, so these companies have to meet or exceed expectations,” Morris-Eyton told CNBC’s “Squawk Box Europe”.
“You’ve already seen some examples of where companies reported numbers online, but they weren’t good enough for the market.”
Robust earnings delivery will be important for equity markets to continue their overall uptrend, but overbought technical data, broadly bullish positioning and seasonal “sell in May” mentality could put equities in the “danger zone” for a pullback if a negative catalyst emerged, Cau suggested.
“The most obvious would be the appearance of a vaccine-resistant variant (coronavirus), but geopolitical flares or a hawkish political surprise could also hurt sentiment,” he said.
“We also recently warned about regulatory / fiscal risk, which has been largely ignored by the markets.”
The latter emerged on Thursday as markets were spooked by reports that the administration of US President Joe Biden is considering increases in the capital gains tax as part of its new economic package.
“Many indicators have been stretched for some time and it would have been premature to reduce risks given the improving fundamentals, but now there seems to be less room for error if something should go wrong,” Cau said.
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