97% of US listed companies that have already released quarterly results beat earnings expectations. The analysis by Giorgio Broggi, Quantitative Analyst of Moneyfarm
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The period in which US listed companies publish their quarterly results, the so-called earnings season, is coming to an end: as of today, August 24, 97% of the sample have now published, including Nvidia last night. Overall, the balance is positive, with 79% of companies exceeding expectations: a figure on profits above the average of the last 10 years, which was 73%. In terms of revenues, 63% of companies exceeded expectations, in line with the average of the last 10 years. Overall, according to Refinitiv, earnings beat estimates by 8%, but there was a 3.2% year-over-year decline in annual profit. Despite everything, the market reaction was modest: the price movement of companies that beat expectations was only +0.5% on average in the two days after the publication of the quarterly reports against an average of 1% recorded in the five-year period.
Technology and banks in the spotlight
In the foreground are the results of the financial and technology sectors: the former is an excellent indicator for evaluating the effects of the increase in interest rates on credit and analyzing the risk of a banking crisis; the second is essential to assess the actual economic impact of the Artificial Intelligence revolution in the short and medium term, which has led to the extraordinary performance of the Nasdaq, with an increase of about 30% since the beginning of the year.
As far as the financial sector is concerned, the big banks have overall shown good resilience, supported by the excellent results of commercial institutions. Notably, JP Morgan outperformed estimates in part on the benefits of the First Republic deal, posting a new earnings record and net interest margin growth of 44% year-over-year. The situation of regional banks is also overall positive, although many of them have experienced a significant decline in profits (eg KeyCorp and Western Alliance). In fact, deposits remained generally stable, especially for the main regional banks, and the possibility of a new run on the branches seems to have been averted, with depositors who seem to have renewed confidence in local institutions. The crisis that followed the bankruptcy of SVB now appears to have been definitively resolved.
For the technology sector, however, the picture is more mixed. 92% of the companies that have published their quarterly results to date have beaten earnings expectations and although up until yesterday the reaction to their quarterly reports has been very negative (even -1.7% in the case of positive surprises normally associated with price reactions positive), Nvidia may have saved the day once again. Indeed, the great protagonist of the revolution has defeated expectations, with a year-on-year growth in profits of 429%, forecasting sales in the third quarter for a value of 16 billion and above all signaling strong optimism to the markets with the announcement of a 25 billion buyback. The results for the moment do not seem to have changed market sentiment too much, with Nvidia only slightly up in the first half hour of opening (about +3%), while the Nasdaq is struggling, fluctuating around zero for the moment.
In short, even if the wave of enthusiasm generated by AI, about which many have expressed their doubts in recent weeks, seems to be fundamentally justified, perhaps the valuations are already too high (Nvidia’s price/earnings ratio is at 244. 9 versus the S&P’s average of 20.7) for the strong year-to-date rally to continue, especially given the market environment characterized by fears that central bankers could step up tightening once again.
How to read the results
As a result, while the results reported so far are positive, company valuations, after a record start to the year, are high and thus earnings will need to not only remain solid, but continue to beat expectations to justify current price levels. Markets are now pricing in fivefold growth in Nvidia’s earnings over the next 12 months. In addition, the US economy has consistently beaten forecasts since the beginning of the year, with inflation falling more than expected and businesses doing well. This trend could continue and the chances of a soft landing are certainly higher than a few months ago. However, we believe that there are still potential downside risks in the current environment, mainly due to quantitative measures and credit restrictions, and therefore maintain a slightly conservative stance.
The S&P index has experienced a significant retracement over the past couple of weeks, mainly due to markets reliance on signals from the Federal Reserve (with rates rising). However, we believe we are close to the peak in interest rates, even on longer maturities. Looking ahead, if Powell doesn’t tighten his voice too much during the annual Jackson Hole conference, the markets could start to grow again, especially after the Nvidia data.
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