Why a strong start to earnings season isn’t halting the slide for global stocks

Corporate earnings season is off to a flying start, but the positive surprises have so far failed to generate upward momentum for global stock markets. As of Friday morning, 13% of companies in Europe and 20% in the U.S. had reported first-quarter earnings, with the majority exceeding consensus expectations. Barclays analysts on Friday highlighted that earnings per share (EPS) growth has been particularly high thus far, at 107% year-on-year in Europe and 63% in the U.S.

EPS beats are above average for a reporting season at 74% in Europe and 83% in the U.S., Barclays highlighted, while sales growth has surprised positively versus consensus by 1% in Europe and 4% in the U.S. Financials have led the beats, with all European financials so far delivering positive earnings per share surprises. However, both European and U.S. markets are down slightly for the week, and Barclays Head of European Equity Strategy Emmanuel Cau suggested that high earnings expectations had largely been priced into markets following their impressive run and re-rating over the past year.

The robust earnings delivery will be important for equity markets to continue their general grind higher, but overbought technicals, broadly bullish positioning and the seasonal “sell in May” mindset could place stocks in the “danger zone” for a pullback if a negative catalyst emerges, Cau suggested. “The most obvious would be a vaccine resistant (coronavirus) variant appearing, but geopolitical flares or a hawkish policy surprise could hurt sentiment too,” he said. “Also, we warned recently about regulatory/taxation risk, which has been largely ignored by markets.” The latter came to the fore on Thursday, as markets were spooked by reports that U.S. President Joe Biden’s administration is considering hikes to capital gains tax as part of its new economic package. “Many indicators have been stretched for some time now and it would have been premature to de-risk given the improving fundamentals, but there seems to be less margin for error now if something were to go wrong,” Cau said.

Why a strong start to earnings season isn’t halting the slide for global stocks, CNBC, Apr 23