As we enter the Q3 reporting season we expect corporate profit and outlook statements to be an increasing focus in the coming weeks. For large US companies (S&P 500), aggregated Q3 profits are expected to decline on both a year-on-year and quarter-on-quarter basis (-1.1% and -1.7% respectively, source: S&P).
More important than the historic numbers will be revisions to company guidance about the future. Already in recent weeks, there have been some high profile negative pre-announcements from the likes of Fedex (freight), Daimler AG (autos) and Norfolk Southern (rail freight), all in economically sensitive sectors.
In the coming weeks and months, 2013 forecasts will also come under scrutiny. In our view, expectations of further gains in profit margins look optimistic unless there is going to be a significant cyclical pick-up in global growth next year. While we do expect some pick-up in global GDP growth, our bias is to think there will be downward revisions to 2013 consensus earnings forecasts from current levels.
This contrasts with recent months, whereby it has been notable that equity markets have rallied strongly, while at the same time, forecasts of global economic growth and corporate profits have continued to be revised downwards.
Clearly, shifts in central bank policy (ECB, Fed) have been an important catalyst for the recent strength in markets – in our view, the change in ECB rhetoric is especially important in reducing tail-risks – and the relative valuation case for equities over fixed income assets has also lent support.
Moreover, several hurdles have been overcome successfully (e.g. German constitutional ruling on ESM, Dutch elections). It is also true that markets are forward looking and should anticipate cyclical turning points (although we are reminded of Paul Samuelson’s famous quote that the stock market “predicted nine out of the last five recessions”).
Spain will remain in the headlines following reports that the country is working behind the scenes with the EU towards an ECB-sponsored rescue package. Spanish public deficit figures are published on Tuesday, the 2013 budget on Thursday and bank stress test results and structural reforms will be presented on Friday.
The Greek finance minister meets with the Troika on Wednesday. German unemployment, European money supply and revised UK GDP are released on Thursday. The French 2013 budget announcement is scheduled for Friday.
In the US, house price data and consumer confidence data are released on Tuesday, new home sales on Wednesday and the revisions to Q2 GDP on Thursday along with weekly jobless claims and durable goods orders. August household income and spending data is released on Friday (modest gains expected).
Next weekend, the final China HSBC PMI manufacturing survey is released. The preliminary measure indicated a small uptick from depressed levels
Category: Finance & Business