After a raft of bad news on the economic front over the past month markets will shift focus to the US September quarter earnings season, which is due to start shortly.
Over the past 3 years US corporate earnings have generally been a bright spot compared to the many issues for the US economy with earnings generally holding up well. Moreover, many US corporates have kept their balance sheets strong.
Ignoring market emotion for a second (difficult for investors to do at present!) there are two key things that ultimately drive the valuation of sharemarkets:
i) interest rates; and
Given interest rates are so low in the developed world any sense that corporate earnings are ok ultimately has to be a positive for sharemarkets. However, this may take time to be recognised in market valuations given the huge uncertainty over Europe currently.
The faltering global economy does seem to be having an effect on US September quarter earnings with corporate downgrades to upgrades running into this reporting season being at almost 3:1, which is higher than usual.
Having said this even after these downgrades the market is still expecting double digit Q3 EPS growth versus the same period last year; not a bad result if this is achieved!
For any sort of rebound in markets US companies will need to at least hit their numbers. There is also the prospect of some M&A (merger and acquisition) activity as some companies seek to increase revenues and market share this way and utilise their strong balance sheets.
Company outlook statements are likely to be a real mixture and some companies will announce job cuts, which might be good for their bottom line but would add to the unemployment issue for the US economy.
The US results season will probably reinforce what we already know, which is the current market environment is very much a stock picker’s market. The key remains finding those companies that can do well in a very difficult economic environment and avoiding those companies which are struggling to adapt to the reality of a lower growth economy.