1st November 2016

What are the biggest factors affecting US earnings?

US equities have delivered strong returns in Q3 and year-to-date, but their performance could be at risk as investors become concerned that corporate earnings will not be enough to support the relatively high valuations for equities at the moment.

Key points covered

  • Strong US dollar impacting earnings
  • Healthcare sector potential winner?
  • Big banking behemoths topped expectations
  • Tech giants remain popular

All you need to know about Q3 earnings season

Along with uncertainty around the US elections, investors are preparing for an increasingly likely interest rate rise from the Federal Reserve by the end of the year.

Company earnings will be scrutinised even more closely than usual this quarter given concern among some investors that stock prices have moved ahead of fundamentals following the S&P 500 index repeatedly hitting new highs this year. Indeed, the forward price to earnings (P/E) ratio for the broad market is well above the five and 10 year averages, according to data from FactSet.

  • The forward 12-month P/E ratio for the S&P 500 is 16.4
  • The 5-year average forward 12-month P/E ratio is 9
  • The 10-year average forward 12-month P/E ratio is 14.3

Factors affecting US Earnings

Financial Analytics company FactSet analysed Q3 earnings conference calls of 25 S&P listed companies to identify what negative impacts they most commonly referred to as possible reasons why their revenues were below expectations. Companies are citing that the main factors that are negatively impacting earnings this quarter are the strength of the US dollar, and political uncertainty around the Presidential Election and further afield in regions such as Europe.

S&P 500 Earnings

Earnings decline expected but 2017 turnaround on the horizon

For Q3 2016, FactSet report that the blended earnings decline for the S&P 500 is -1.8% (as at 14 October). If this happens it will mark the first time the index has recorded six consecutive quarters of year-on-year declines in earnings since the financial crisis in 2008. Earnings are expected to return to positive territory in Q4. For 2016 analysts are projecting earnings will be more or less flat but for 2017 projected earnings growth is projected to be 12.8% as analysts are expecting a profit rebound in the energy sector, depreciation of the US dollar as well as overall strength in the global economy.

Winners & losers – predicted year-on year earnings

Positive Growth: Utilities, Consumer Discretionary, Healthcare, and Materials sectors.

Negative Growth: Energy, Industrials and Telecoms

Big banking behemoths topped expectations

Last week three of the US’s largest banks – Wells Fargo, JPMorgan Chase and Citigroup – posted better than expected earnings and revenue but saw profits fall as low rates impacted lending margins. However they beat analyst forecasts. Michelle McGrade, chief investment officer at TD Direct Investing, believes this is more a matter of circumstance rather than exceptional business performance.

“Expectations have been set fairly low for the banking sector, so beating them is relatively easy. Banks should continue to see pressure on interest income while rates remain at all-time lows. Meanwhile, additional pressure from a strong Dollar and looming uncertainty in Europe post-Brexit could have negative ramifications.”

One to watch?

According to our partners at TD Ameritrade, one other thing investors might monitor is the oil market, which reached one-year highs last week even though US crude inventories rose for the first time in six weeks. OPEC’s plans to cut supplies have boosted crude futures by about 25% from summer lows, and the question is whether futures can get a foothold above $50 a barrel. That level has been a technical barrier in the past. The stock market has typically responded positively to stronger oil prices over the last few months, so let’s see if that trend continues.

What US stocks were TD customers buying and selling?

The tech giants remain perennially popular with our customers, with Apple, Facebook, Amazon and Google owner Alphabet taking the top 4 most popular positions. In fact 9 of the top 10 most popular US stocks in Q3 were tech companies, with the world’s biggest ecommerce site Alibaba in 10th place.

To help remove the effect of day trading bias, where some stocks can see high volume trading moving them up the ‘most traded’ rankings, we’ve taken a look at the US stocks most customers have traded. This gives us a good picture of what’s been popular among UK customers trading the US markets.

Stock nameBuy/sell ratio
Apple
View report
Facebook Inc
View report
Amazon Com Inc
View report
Alphabet Inc
View report
Tesla Motors Inc
View report
Liberty Global Plc
View report
Twitter Inc
View report
Verizon Communications
View report
Microsoft Corp
View report
Alibaba Group Hldg
View report

Our most popular investments should not be taken as a personal recommendation to buy or sell a particular stock. Instead  it’s simply an indication of the general buying and selling trends of our customers, observed in the period stated.

Who’s up next in earnings season?

Over the next weeks we will see technology, consumer and energy companies, as well as banks, all reporting, which will provide plenty of direction for the market. Remember to download our Wall Street chart for all the key dates for this earnings season so you can monitor your positions. Click on the image below to download it.

wall-chart-2016

All dates are estimates as of 18 October 2016.

Find out more about buying US shares online with TD Direct Investing and how you can buy and hold US$ directly in one trading account.

 

Investments may be affected by currency fluctuations which might reduce their value in sterling. 

We may receive two elements of commission in relation to international dealing – Trading Commission and our FX Charge. Please see our Rate Card for full details of the relevant costs.

Foreign markets will involve different risks from the UK markets. In some cases the risks will be greater.

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