Markets: equities continue to creep up
Patrik Lang, Head Equity Research, Julius Baer
Equities have continued to creep up a little bit each day last week, as another surprisingly positive earnings season in the US is now coming to an end. With 90 per cent of the US earnings season over, the S&P 500 has reported Q2 earnings-per-share (EPS) growth of 9 per cent compared to the same period last year, on the back of 5 per cent sales growth. The proportion of positive sales and earnings surprises has reached a multi-year high, with information technology and pharma companies as its main drivers.
The proportion of pharma and technology stocks that have beaten earnings expectations is close to record highs. The only sector that came in below market expectations and sees downgrades to consensus expectations is energy. Turning to Europe, where around 60 per cent of all Stoxx 600 companies have published results so far, earnings growth is even stronger (Q2 EPS is up 13 per cent), driven by better-than-expected earnings from banks and industrials. However, and for the first time since Q1 last year, earnings forecasts for European companies are revised downwards due to the lower oil price and the recent euro strength.
We continue to be optimistic about Euro zone equities, as valuations remain highly attractive relative to the US, and earnings momentum is also in favour of the Euro zone. With regard to currencies, we believe that the euro is currently in a phase of overshoot. Our models tell us that, based on interest-rate differentials and speculative positioning, the euro should weaken against the US dollar and in particular against the Swiss franc.
The strong US employment report last week clearly supports our positive view on the dollar, even if wage gains continue to be moderate. With the unemployment rate at 4.3 per cent, a new 16-year low, we believe it will be just a question of time before wage growth gets closer to the 3 per cent run rate, where it should be.