KEY TAKEAWAYS
- European earnings have surprised on the upside while guidance has led to rising estimates, contributing to strong recent performance by European stocks.
- Japan’s first quarter revenue growth outpaced both the U.S. and Europe, while Japanese companies beat revenue forecasts at a solid rate.
- Improved earnings outlooks overseas underpin our improving — but still cautious — view on developed foreign markets, although we continue to recommend investors focus equity allocations in the U.S.
Global Earnings Update: The Tide is Turning
by Burt White, Chief Investment Officer, LPL Financial
Last week in a tribute to David Letterman’s last Late Show, we highlighted our top 10 keys for stocks. But there was one notable omission: earnings. With the U.S. earnings season effectively over, we did not list earnings as a key driver (though we did note that earnings may get a lift from the potential U.S. economic snapback). But that does not mean that earnings aren’t important. Not only are earnings important for U.S. stocks, they are important for overseas markets as well. This week we evaluate earnings seasons in Europe and Japan, and compare results with those in the U.S., to help inform our global asset allocation decisions. (We plan to look at emerging markets earnings in a future publication.) We continue to focus our allocations within developed markets in the U.S., but have begun to warm up to developed foreign markets in recent months.
GLOBAL EARNINGS PICTURE
We recapped the U.S. earnings season two weeks ago in our Weekly Market Commentary, “Earnings Recap: Good Enough?” (May 11, 2015) and noted that results relative to expectations were good. Excluding the energy sector, S&P 500 earnings grew at a very respectable high-single-digit pace year over year. And despite the stiff headwinds (strong dollar, lower oil prices, West Coast port strikes, severe weather, etc.), guidance was good enough to limit earnings revisions for 2015 to just a marginal decline. We remain comfortable with our view that earnings in 2015 may be good enough to get us to our 2015 total return forecast for the S&P 500 of 5 – 9% for the year.*
* Historically since WWII, the average annual gain on stocks has been 7 – 9%. Thus, our forecast is in-line with average stock market growth. We forecast a 5 – 9% gain, including dividends, for U.S. stocks in 2015 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies growing 5 – 10%. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2015.
But what about earnings in Europe and Japan? There the picture may be brightening. While the U.S. was the earnings growth leader in recent years, the tide has begun to turn overseas.
Earnings figures may vary depending on the source (Thomson, FactSet, Bloomberg, etc.). Data providers have different methodologies for calculating earnings, and different interpretations of what constitutes operating earnings as compared with reported (GAAP) earnings. In general, we favor the Thomson data series’ long history in the U.S., but view FactSet as a reliable source of international earnings data.