First-quarter corporate earnings in the US and Europe were slightly better than the market expected. However, the percentage of companies beating expectations was the lowest since the global financial crisis
There was significant dispersion across sectors, which translated into divergent regional performance. A powerful reminder that sector composition matters when assessing the prospects for regional equity markets
We remain moderately overweight equities, with increased exposure to information technology and healthcare. Regionally, this translates into a greater exposure to US equities and emerging market equities over their European counterparts
With over 70% of companies having reported in the US and in Europe, earnings in the first quarter are down year-over-year (YOY) by approximately 8% in the US and by 21% in Europe. The approximate 13% earnings outperformance YOY of the US versus Europe is similar to the trend of recent years. The main reason for the divergent performance is the difference in sector composition. For example, information technology accounts for 22.7% of corporate profits in the US, compared to just 2.6% in Europe. European companies have also been hit harder as COVID-19 containment measures typically started earlier than in the US.
Equities are a long-duration asset, with earnings projected into perpetuity. A singular quarterly earnings season should not impact equity prices materially. Nevertheless, it is notable that, while earnings expectations for 2020 are still being revised lower, the pace of downgrades has diminished.
If we look beyond 2020, we see analysts expect a normalisation of earnings growth, with 15% cumulative earnings growth expected between 2020 and 2022 in the US, and 10% in Europe. You can also see the first positive change in forward three-year earnings growth expectations, with a slight uptick in the European expectations.
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Bill Street Group Chief Investment Officer
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