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Big week for earnings

By David Morrison  |  22/10/2018 14:50
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The US earnings season picks up this week while Italy confronts Brussels and authorities step in to shore up Chinese equities

The S&P 500 ended Friday’s session effectively flat. However, this doesn’t tell the whole story as the index began the session sharply higher only to give back all its gains once Europe closed for business. This dynamic was even more pronounced for the tech-heavy NASDAQ Composite which ended the session 0.5% lower while the Russell 2000 closed over 1.0% lower. The Russell is a broad-based index comprising around 2,000 US ‘mid-cap’ companies and is more domestically-focused than the Dow, S&P or NASDAQ.

P&G lifts Dow

The Dow Jones Industrial Index bucked the trend and closed higher, thanks almost entirely to a single stock. Procter & Gamble surged 8.8% on the day, posting its biggest gain in 10 years following better-than-expected earnings. The Dow is unusual in that it is a price-weighted index, rather than a market capitalisation weighted index. This means that a high-priced stock has a greater impact on the index than a low-priced stock, given the same price change in terms of dollars and cents. It also means that a large price change in a single stock relative to all the others has the potential to give a distorting view of the index.

Italy ‘stable’…

Going into the US open on Monday, all the major US indices were firmer, reversing overnight weakness. Traders were in a bullish frame of mind following a sharp 4% rally in the Shanghai Composite on the back of calming words from Chinese regulators and President Xi Jinping. There was also relief that ratings agency Moody’s refrained from downgrading Italy’s credit rating to ‘junk’ while describing the country’s outlook as ‘stable’.

…or maybe not

But European and US equities turned lower soon after the open as it became apparent that Italy’s coalition government has no intention of backing down on its budget proposals, defying the European Commission. There’s also a growing feeling that the Trump administration is prepared to continue to turn the screws on China as the latter is unwilling to engage on issues concerned with intellectual property. It looks as if a side meeting between Presidents Trump and Xi at next month’s G20 meeting in Argentina is unlikely to happen.

Third quarter earnings

Meanwhile, the US third quarter earnings season steps up a couple of gears this week with an avalanche of major corporations due to report. Bullish investors are hoping that another strong quarter will support equities and provide another burst of upside momentum to drive the major indices to fresh highs into the year-end.

Solid so far

So far, 17% of companies in the S&P 500 have released their earnings, including the major banks. Analysis from FactSet shows that of these, 80% have beaten consensus forecasts for earnings while 64% have beaten on sales. Unfortunately, most companies have held off from issuing forward guidance. Of those that have, nine have issued negative earnings-per-share guidance while four have been positive. Yet overall, the quarter is shaping up to be a good one and investors are hoping that this will be accompanied by news of share buybacks and dividend announcements. Whether this will be enough to give the major indices a much-needed boost for the rest of the year remains to be seen. But we may have a clearer picture by the end of this week. On top of this we have an ECB monetary policy meeting on Thursday and the first look at third quarter US GDP on Friday.
 
 
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