Earnings season: Was 2018 a good vintage?

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03/05/2019 | 04:29 pm
The time has come for an assessment of 2018 for listed companies. In the United States, this quarterly season is a good summary of recent market psychology: figures that do not justify the panic at the end of the year, but offer an opportunity to discreetly get rid of overly optimistic forecasts.


The outcome of the 4th quarter of 2018 is not so bad, especially if we compare it to the cataclysmic predictions of some prophets of doom. Some 69% of American companies exceeded earnings expectations and 61% topped sales expectations. This is a little less than the 5-year average for the results, and a little better for the turnover. Focusing only on profits, the data collected by Factset show that there are large sectoral disparities, as illustrated in the following table. In information technology, 85% of companies exceeded expectations, while only 44% were in real estate. Two sectors are tied when it comes to determining which industries have published the most under expectations: financials and materials (38%, this category being broad in the GICS classification since it includes steelmakers, papermakers, construction materials, packaging or chemicals).

Source Factset - Click to enlarge

The biggest changes have occurred on the forecast side. As we have already mentioned in these columns, there was a gap between an unfavorable economic context and overly optimistic projections. In recent weeks, the gap between reality and fiction has been narrowed. A healthier situation that has contributed to the recent easing in the markets. Analysts now expect a contraction of -3.2% on average for profits in the first quarter of 2019 (compared to the first quarter of 2018), before a slight recovery in the second quarter (+0.3%) and a slightly more solid recovery (1.9%) in the third quarter, still year-on-year. However, it should be noted that professionals are expecting a 4.1% increase in results for the full year 2019, with very high expectations for the last quarter of the financial year, from which they expect profits to accelerate by 8.5%. Let us hope that this is not another over-optimism.
 
Source Factset - Click to enlarge

The downward adjustment in analysts' expectations for the first quarter was abrupt (and therefore beneficial), as noted by Factset, which suggests a -6.5% reduction on the average S&P500 company. The market is still overly optimistic before the release of the 4th quarter results. Historically, the correction has reached -2.4% on average 5 years, -2.8% on average 10 years and -2.9% on average 15 years. The first quarter of 2019 is therefore quite exceptional from this point of view, even if higher revisions had already been observed recently (-8% in Q1 2015 and -8.4% in Q1 2016).

Based on the 12-month forecasts, the average PER for US equities is 16.2 times. This is slightly below the 5-year average (16.4), but slightly above the 10-year average (14.7). At the sectoral level, discretionary consumption remains strong with an average 12-month PER of 20.1 times, the highest of all industries. Financials are closing the gap, at 11.6 times.

In summary, US publications in the 4th quarter of 2018 were better than expected, but not as favorable as in the recent period, while analysts revised their expectations for 2019 quite significantly downwards, especially for the beginning of the year.
Anthony Bondain
MarketScreener.com 2019
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