Weekly Update: Q1 Earnings Season

Weekly Update: Q1 Earnings Season


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.


 width=354 height=298 /><br/><br/>If we take earnings estimates for 2020, then one-year forward price-earnings (P/E) ratios look expensive in the US (22x) and in Europe (18x) compared to history. However, with a longer-term horizon, at current market levels, three-year forward P/E ratios look reasonable compared to history, at 15x for the US and 12x for Europe. Granted, equities are not cheap, but in a context of low interest rates, assuming growth rates stay constant or improve, then equities have more to offer.<br/><br/><strong>THREE-YEAR FORWARD PRICE / EARNINGS </strong><br/><br/><img class=alignnone size-medium wp-image-6191  data-cke-saved-src=https://brownshipley.com/wp-content/uploads/2020/05/Image-2-300x291.png src=https://brownshipley.com/wp-content/uploads/2020/05/Image-2-300x291.png alt=

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Bill Street
Group Chief Investment Officer

Carolina Moura-Alves
Cyrique Bourbon
James Purcell

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