Homepage / Investment / Why this US earnings season is all about wages
Buffett, Bezos and Dimon's health-care pick is known as a thought leader, not a business leader Alexa goes to college: Northeastern is giving students Amazon Echo Dots Disney-Comcast bidding war for Fox will go up to $45 a share before Disney wins: media expert Tesla's alleged rogue employee is exactly what Congress is worried about with self-driving cars Former Citrix chief Mark Templeton takes over at cloud start-up DigitalOcean Apple makes a big push into kids' content with creators of Sesame Street A year later, what Uber has done to revamp its troubled image The United States just built the world's fastest supercomputer — here's what that means Instagram crosses 1 billion monthly active users, unveils long-form video Microsoft acquires Bonsai to help with its artificial intelligence push Stitch Fix shares pop on speculation of Oprah taking stake in the company The AT&T-Time Warner ruling is making the Murdoch family billions of dollars richer Here's why Google and Amazon probably will never be included in the Dow Chinese investment in the US drops 90% amid political pressure Tesla sues former employee for allegedly stealing gigabytes of data, making false claims to media Nasdaq CEO says ICOs are 'taking advantage' of retail investors JP Morgan is unleashing artificial intelligence on a business that moves $5 trillion for corporations every day This health tech start-up refused to take money from VC firms unless they had a female partner General Electric shareholders should rejoice at the Dow removal US existing home sales fall for second straight month Silicon Valley has an Achilles’ heel that threatens its supremacy in innovation Threatened by coalition partner, Merkel seeks to break migration deadlock China has an Iran oil lever over Trump and it's all playing out at OPEC meeting How tech companies conquered America's cities Nantucket home prices break record highs Oracle reduced visibility into its cloud business, and some analysts aren't happy Buffett, Bezos, Dimon appoint Dr. Atul Gawande as CEO of their newly formed health care company AMC will offer its own MoviePass-like subscription AT&T Advertising CEO: We need to buy more technology to make ads less obtrusive and more relevant Buy beaten-down Citi shares ahead of stress test results and earnings, Deutsche Bank says Disability applications plunge as the economy strengthens A ‘day of reckoning’ is coming for stocks. Here’s what could spark it, says market watcher Disney raises bid for Fox assets to $71.3 billion in cash and stock Morgan Stanley downgrades Starbucks due to its China sales growth stumble Trump wages trade conflicts during historically difficult time for the stock market A cruel summer for stocks is likely upon us, Federated's Phil Orlando warns OPEC set for a collision course over production policy ahead of landmark meeting Stocks making the biggest moves premarket: WGO, GE, FDX, ORCL, SBUX & more GE shares drop after the blue chip gets booted from the Dow, ending a 110-year run EU to hit $3.2 billion of US imports starting Friday in response to Trump's tariffs Mortgage applications jump 5.1% as interest rates settle Kroger, on a 'wild ride' in the last year, reports earnings this week. Here's how to play it Hopes are rising of a breakthrough in one of Africa's longest conflicts Bitcoin is 'not for me' but it's too 'arrogant' to say it won't have a future, Goldman Sachs CEO says High oil prices are a massive headache for India as economy gets 'pinched' The ECB has lost its independence in the wake of the debt crisis, a former member claims The ‘crypto sculpture’ and how hyped things have become Asian economies have a lot to lose in a US-China trade war CEO explains why his Australian company just announced 8,000 job cuts European stocks seen higher amid rising trade war fears; OPEC in focus White House says China's 'economic aggression' is a global threat The inspiration for tech titan Jack Ma's Alibaba was an unlikely politician Microsoft's Nadella: Trump administration policy separating children from families is 'abhorrent' A major cryptocurrency exchange says it was hacked and $30 million in coins was stolen Canada approves recreational use of marijuana Lapses at many levels of bank led to India's huge PNB fraud, internal report shows Australia's largest telco says it will cut 8,000 jobs over the next three years China-based hacking campaign is said to have breached satellite, defense companies Kim Jong Un and China's Xi discuss 'a new future,' North Korean media says Worst isn't over for General Electric, predicts ex-GE transportation CEO Asian shares set for mixed open after trade fears spook markets worldwide Cramer: Tesla's stock still has more upside—just use the right chart Cramer points to the trillion-dollar question about US-China trade: What about Apple? Elon Musk: If I can help kids at the border, I will SNAP CEO on Innovation and Imitation Oracle reports strong fourth quarter results and stock edges up Start-up that uses polymer science to make avocados last longer just scored a deal with Costco Here's a map of every Whole Foods where you'll get an Amazon Prime discount The CEO of agency giant IPG welcomes challengers to Facebook and Google: 'The more the merrier' Traders bet one soaring tech stock is about to lose steam Facebook takes another shot at grabbing social media stars from YouTube UK says it is happy with Rupert Murdoch's Sky News commitments related to bid for parent company Apple CEO Tim Cook says separating immigrant children at US border is 'inhumane' In the short history of Trump trade conflicts, it has paid to buy the market dip Danny Meyer stands by cashless push: 'We're unaware of any federal law' that requires accepting cash Express Scripts boots another online pharmacy — CareZone — from its network Home Depot and two other Dow stocks look ripe for a buy, says technician Snap shares plunge after analyst says users are less engaged White House's Navarro on China trade talks: No knowledge of Apple iPhone exemption Merkel, Macron agree on euro zone budget Walgreens and Humana are partnering to create senior health hubs Sarepta Therapeutics shares soar 50% on positive preliminary results for muscular dystrophy gene therapy Verizon pledges to stop some selling of phone-location data There's one Dow stock having a great day: Verizon Europe's IPO market heats up, and unicorns are getting in line Amazon wants a hand in all your deliveries, unveils last-step option for FedEx, UPS and private mail Soybean prices drop to two-year low on US-China trade war fears Cramer: US-China trade fight 'is not serious' right now; Trump has upper hand China has a limited number of weapons to use in a trade war with the US Laws governing medical marijuana could soon be relaxed in the UK The flip phone is about to make a big comeback as foldable screen nears reality Here is what a student could have made if they invested their 2014 summer earnings in FANG stocks VW names interim Audi boss, seeking to steady brand after its CEO's arrest Here’s the fundamental error in Trump’s trade strategy Chip stocks dive on trade war fears as industry gets a majority of its revenue from China New home construction booms to a near 11-year high in May A dangerous dot-com era phenomenon is back and it's going to inflict pain, Jim Paulsen warns Netflix gets a $500 price target, the highest on Wall Street Apple is the big tech firm most at risk from a US-China trade war AT&T promises fewer ads, tailored programming after merger with Time Warner

Investment

Why this US earnings season is all about wages

As the third-quarter earnings season gets under way, we should all expect to be surprised. There is an overwhelming consensus among Wall Street’s strategists that their brokers’ earnings forecasts, now calling for S&P 500 earnings to rise 4.6 per cent exactly year-on-year, are far too low.

The consensus is overwhelming. JPMorgan expects earnings to “outperform sharply lower expectations”. Morgan Stanley‘s earnings preview is headed “Third-quarter earnings are too low”. As the S&P rallied strongly leading in to earnings season, it is evident that many came to the same conclusion. As Bank of America Merrill Lynch put it: “A good third quarter is priced in — guidance better be great”.

So, are earnings forecasts too bearish, and if so will there be a further pop upwards for stock markets when this proves to be the case?

Receive 4 weeks of unlimited digital access to the Financial Times for just $1.

According to Thomson Reuters, brokers’ 4.6 per cent forecast is down from 5.9 per cent at the beginning of the month, and 14.9 per cent a year earlier. Estimates usually fall as a quarter approaches, but this is a lot. Energy stocks complicate the issue. Thanks to the low base set while oil prices were at their nadir, they are projected to show an annual increase of 139 per cent. Small errors here could have a magnified effect.

Two other reasons why the US earnings outlook has worsened go by the names of Harvey and Irma. The hurricane season ensures that insurers’ profits will be worse than expected at the beginning of the summer. How much worse remains a matter of guesswork.

Beyond the specific case of insurers, it is hard to see why US earnings momentum should be as bad as it is, when earnings expectations for the rest of the world remain robust. According to Société Générale, downgrades now make up slightly more than half of all estimate changes for the past four weeks in the US — the same figure for the world as a whole is 51.5 per cent. In Japan, earnings optimism is strong, with 66 per cent of companies upgrading rather than downgrading.

The entire world economy appears to be in a synchronised expansion at present, if a variety of leading indicators are to be believed. That has helped stock markets rally everywhere (including in the US) and it should help the profits of the many multinationals in the S&P. Revenue growth will not be a problem.

Further, those multinationals should benefit, unlike the rest of the planet, from the weakening dollar. This should automatically make their overseas earnings look better in dollar terms. According to BofA this should be the first quarter since 2011 when dollar comparisons actually help US earnings, rather than depressing them.

All of this makes a big earnings beat look like a slam dunk. But now we must consider margins. According to JPMorgan, Wall Street is braced for a reduction of 0.52 percentage points in margins since the second quarter, with only energy and technology expecting an improvement. The bank describes this as “conservative” and forecasts margins could be the kicker for an earnings beat.

This is the critical point of disagreement. To put it in fashionably Marxist terms, capital has been beating labour ever since the crisis. Wage inflation has remained very low, boosting profit margins. With labour markets tightening, and macro surveys showing wage inflation rising to a post-crisis high (from very low levels), there is reason to doubt that this can continue.

Wage growth would be exactly what Trump voters (and anyone concerned by rising inequality) want to see. But it would be doubly bad for Wall Street. It would both eat into margins, but raise the chances of higher rates from the Federal Reserve. That would endanger hopes for future profit growth and multiple expansion.

David Kostin of Goldman Sachs suggests that what executives have to say in their earnings calls about wage pressures and their ability to retain workers will be critical to how this earnings season is received. No issue preoccupies Wall Street more at present — with the possible exception of the prospects for a corporate tax cut, which would transform 2018 earnings prospects if something can be agreed by the end of the year.

Even given concerns about margins, it looks a very good bet that earnings will eclipse forecasts. Savita Subramanian of BofA points out that of the trickle of companies to report so far, 87 per cent have beaten on earnings and 70 per cent on both earnings and sales. This ties with the second quarter as the best showing by early reporting companies since the bank started keeping records in 2012.

The problem is that such beats have already been priced in by the strong markets of recent weeks. She adds: “A solid earnings season may not be enough to move the market higher — valuations are lofty, focus has increasingly shifted to policy, and last quarter, for the first time since the peak of the Tech Bubble, beats were not rewarded”.

There is always a temptation, faced by a strong consensus, to bet against it. It should be resisted; it does indeed look as though brokers’ analysts have been too conservative. But with the market so strong, and with expectations for future earnings muddied by questions over tax reform, investors should not put more money to work without listening to what politicians say about tax — and what companies say about wages.

More from the Financial Times:
Walmart surges on upbeat earnings guidance
Brazil’s utility companies put out the welcome mat for China
Decoding cancer: a new age of precision medicine

Source: Investment Cnbc
Why this US earnings season is all about wages

Comments are closed.