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10 Oct 2018 – Insights

Strong american earnings ahead – but don’t count your chickens yet

A new and promising earnings season is about to kick off in the US. Danske Bank’s chief strategist, Tine Choi, outlines what she will focus on and highlights the potential pitfalls that could ruin the party.

The US earnings season kicks off on 11 October, and like the first two quarters of the year everything points to a strong set of financial reports. Consensus currently puts expected earnings growth at 19.2% and revenue growth at 7.3% for S&P500 companies.

While earnings expectations are lower than the growth rates of around 25% in Q1 and Q2 this year, the outlook nevertheless testifies to the global upswing continuing. 

If expectations are met, this would be the third highest earnings growth rate since Q1 2011. Hence, in our view, there is still good reason to overweight in equities and underweight in bonds.

Tine Choi

Chief Strategist, Danske Research

Lurking dangers
That being said, this reporting season could throw up several unpleasant surprises that might upset the market. We should remember, first, that more companies than usual have issued negative guidance – in other words, revised down their earnings ahead of the quarterly reports; and second, that the tight labour market is increasingly making itself felt.

Average US wage growth is still modest at 2.8% y/y, but historically low unemployment coupled with a record high number of job vacancies underscores that more and more companies are having difficulty finding qualified labour. This will inevitably increase the pressure on margins via rising wage costs for both new hires and staff retention. With the quarterly reports we will therefore be keeping a close eye on any comments about labour market bottlenecks that could potentially form capacity limitations for corporate activity.


We will also be focusing on comments addressing the higher tariffs mainly imposed on imports from China but also on steel and aluminium imports. During the Q2 earnings season the trade war was noticeable by its absence from financial reports, so any hints on the effects of the trade dispute will attract careful scrutiny and could potentially put a damper on US equities – which so far appear to have been completely unaffected by the trade war.

Additional focus on technology
Finally, we expect tech companies will attract at least as much attention as in the previous earnings season. The new sector classifications have come into force with the introduction of the communication services sector, which includes Netflix, Facebook, Alphabet (Google) and telecom companies from the now defunct telecommunications sector. Investors should therefore exercise particular care when looking at growth figures for the IT sector and the new sector.

We are also keen to see whether the limited increase in new subscriptions at Netflix was caused by the football World Cup and the summer holidays, or whether tough competition among streaming services is having an impact. Last but not least, we will be looking to see if Facebook’s challenges have dented the company – in other words, will we get confirmation that growth here is shifting down a gear and that the company’s reputation has perhaps suffered more long-term damage from user data security breaches.