Are you ready for US earnings season?

This blog was published on 08/07/18 and does not constitute advice, nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

US earnings season is underway and with it a spotlight on US equities. Earlier this year – the previous quarterly earnings – strong results prompted US equities to be upgraded by most banks and asset managers from negative to neutral; the first time since Trump started as President.

US equities have shone on the back of tax reform and domestic economic strength. The combination of robust US jobs growth and stable inflationary pressure has been a good environment for US equities. The S&P 500 is now trading around 2,802 and is up 13.42% in 2018. They are also doing much better than their European counterparts. The EuroSTOXX 50 has only risen 2.07% in 2018, while the FTSE 100 has gone up 4.64% and the CAC 40, the best performing European index, 7.81%. 

US tech companies have driven much of the uptick. They did particularly well in the first quarter of 2018 prompting analysts to forecast a 20.5% rise in second-quarter profits for S&P 500 companies from 2017. 

However, the US benchmark has taken something of a battering in the last few weeks of June/July 2018. Netflix, Twitter and Facebook saw their share prices drop in July amid revenue expectations being missed. Facebook’s record breaking 20% one day share price fall didn’t help; the S&P 500 fell -0.58% and the Nasdaq fell 1.39% the day after Facebook announced its disappointing quarterly results. These big shifts in the benchmarks were largely due to the size of holdings that Facebook accounts for. Slickcharts shows that Facebook’s holding is now at 1.73% in the S&P 500 (as at 02/08/2018), the fourth largest stock. SeekingAlpha reports that that the holding has increased from 1.64% four months ago in March 2018. It says: “A little over $1 out of every $50 invested in the companies that make up the S&P 500 are invested in shares of Facebook.”

The outlook for US equities also includes navigating Trump’s trade wars. Analysis from UBS in August 2018 shows that a global trade war would knock a fifth off the value of the US stock market, while the S&P 500 could lose as much as 20% from current levels as earnings fall. 

They could also be shifting from growth to value. 

"Of the five FAANG stocks1 that have reported, two have flopped along with a few other high growth/high momentum names and this group is coming under pressure," Jefferies equity strategist Steven DeSanctis said in a note to clients on Monday as reported by CNBC. "We think this presents us with the catalyst to shift toward value and valuations mattering."


Despite all this, there are still reasons to look to the S&P 500 for exposure to US equities. Firstly, not all tech companies have done badly. Amazon saw its second quarter results nearly double analyst estimates in terms of earnings per share, with $5.07 being reported compared to the estimated $2.54. 

Google and Apple have yet to release their quarterly earnings. 

The drop in share price and earnings forecasts could be the catalyst these big tech companies need to make changes for the better. 

CNBC reports that "The guys at the top don't stay there forever," said Kim Forrest, senior equity analyst at Fort Pitt Capital. "I don't see anyone displacing them right now, but they do have to make changes to their business models. For example, Facebook has to spend more money to make sure people aren't abusing the platform. Investors like more money, not less."

Events such as earnings season and Fed announcements typically move US equities and by knowing what to look for its possible to make the most of day moves in the index. For example, Facebook released its earnings Wednesday (25th July 2018) and the S&P 500 fell 1% to Friday, and using leveraged ETPs is one tool sophisticated retail investors have at their disposal. If you were looking to short the S&P500 or example, Societe Generale offer both x3 short leverage (SG92) and x5 short leverage (SG89 & SG93) Exchange Traded Products that are listed on the London Stock Exchange and available to trade throughout the day via many stockbrokers in the UK.

1 FAANG stocks: the market's five most popular and best-performing tech stocks, namely Facebook, Apple, Amazon, Netflix and Alphabet’s Google. 

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

Post by: Zak de Mariveles, Head of UK Exchange Traded Products

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