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What Q3 earnings told us about investing in corporate America

Now that the dust has settled on the Q3 earnings season in the US, we thought it worthwhile looking back at the results to see what they tell us about corporate America and investing in US equities over the next few months – especially in light of the sharp sell-off of recent weeks. 

Overall, earnings were very strong - with almost all sector and segments beating estimates. At the stock level 80% of companies beat median analyst expectations. NASDAQ 100 companies enjoyed particularly strong results and beat expectations by 10% on average. Companies in the consumer discretionary and energy sectors did even better, with both beating aggregate estimates by 15%.


All good things come to an end

On the flip side, small-caps (as viewed through the lens of the Russell 2000) were one of the few areas to miss expectations and it’s this area that intrigues us most. Given small-caps are more exposed to the domestic economy, less sensitive to dollar moves and thus less affected by a strong dollar, could these results signify the US economic cycle is coming to the end?

The market certainly seems to think so; unlike previous quarters, strong earnings have not been rewarded by investors, with the NASDAQ 100 17% off its September peak by year end. The two champion sectors have suffered even more. Consumer discretionary is 15% below its own September high while energy has fallen even further (down 22%). Domestic-focused areas suffered most however during December’s declines as less dovish Fed and turmoil on the Hill took their toll.

So where should investors look in the US? As the chart below shows that over Q4 2018, lower volatility defensive sectors such as utilities and staples have performed significantly better than the higher risk counterparts despite reporting worse earnings on average. From the risk factor perspective, quality and low volatility indices have performed better. In our view, this show that we are transitioning from an earnings driven market to one more driven by sentiment – and that sentiment has become even more unsettled since the mid-terms. 


A disproportionate reward?

chart 1

Source: Bloomberg, Lyxor Asset Management International, data as at 31 December 2018

Know your indices

Even if President Trump’s fiscal stimulus has done enough to avert the threat of recession until early 2021, gridlock on Capitol Hill could have some serious market and economic consequences. More frequent government shutdowns and more talk of impeachment could be damaging at such a late stage of the cycle – especially as the growing deficit does not leave much room for manoeuvre. Knowing your indices inside out could be more important than ever.

Use our tool, or our guide, to find out more.

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