Equities Market Perspective


Global Q1 2017 earnings delivery was the best quarter in over six years . In this month’s update Ritu Vohora, Investment Director, reviews the earnings outlook for the rest of the year.

For a quick snapshot of the equity market over the past month and our latest theme, please download our Equities market perspective note.


Hello and welcome to this month’s equity market review with me, Ritu Vohora.

The global equity rally continued in May, despite a choppy market. Volatility increased driven by elevated political uncertainties, a downgrade on China’s sovereign rating and OPEC’s decision to extend output cuts. Europe was the best performing region, while the US lagged. The euro continued to strengthen against other major currencies, wiping out market gains for euro-based investors.

In commodities, gold was flat over the month, while the oil price came under renewed pressure despite the agreement to extend production cuts.

Looking at sectors, utilities and technology led performance while energy and financials lagged, weighed down by a depressed oil price and flatter yield curves. Defensive sectors generally had a strong month. This was reflected in style performance with quality outperforming value across all regions.

This month’s theme looks at the recent earnings season.

The global earnings recovery has been impressive with Europe, Japan and emerging markets in particular, delivering strong EPS growth. In contrast to recent years, when optimistic expectations had to be toned down, analysts are now revising their earnings expectations upwards for global equities in twenty seventeen.

In Europe for example, the net number of earning upgrades for the Stoxx 600 has risen to the highest level since 2010. The improvement in revenues, particularly from cyclical companies, and the strong global earnings picture, support above-trend growth in the global economy.

In the US, 89% of S&P500 companies have reported first quarter earnings, with 78% beating EPS estimates and surprising positively by 5%. Earnings growth remains strong at 14% year-on-year, largely driven by technology and financials. Telecoms is the only sector with a majority of companies missing EPS estimates and delivering negative earnings growth. Given high expectations though, estimates have been revised down moderately in the US and stretched valuations point to better prospects elsewhere.

European and emerging market equities should provide greater upside, given their recovery from a low base and more attractive valuations. 98% of Euro Stoxx companies have released Q1 earnings with 61% beating EPS estimates, surprising positively by 8%, with EPS growth coming in at 20% year-on-year. The proportion of firms beating EPS and sales estimates has increased, moving above their long-term medians.

Importantly, the recovery has been broad-based, rather than just from a handful of sectors or stocks. In 9 out of 10 sectors, more than half of companies have beaten expectations, led by financials.

Will this investor focus on earnings continue? It largely depends on the outlook for earnings. While expectations for the second quarter are not excessive, arguably the bar for earnings to surprise materially again, has moved higher. The global recovery remains intact, but base effects are turning less favourable, with leading indicators pointing to more modest expansion, commodity prices have rolled over and FX support may be reduced. This all points to softer EPS momentum ahead.

The equity rally has been broad-based, backed by widespread earnings growth and a global reflationary backdrop. While there is room for further upside, a selective approach will be important to navigate the road ahead.

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