• There’s no reason to expect bad results. The macro backdrop has been broadly supportive for corporate profits. PMIs across the world have been on average higher than this time last year, as have most commodity prices with the notable exception of oil. At the same time, there has been no major headwind for profits from currency markets. 

  • The beneficial base effects are beginning to run out. Q1 growth benefited from a low base of depressed index-level earnings from a low oil price and a relatively weak phase of the global economy. But the year-on-year benefits from both peaked in Q1 this year and the oil price has recently reversed. We should expect earnings growth to gradually revert back towards the underlying growth rate, which I would put in mid-single digit territory for the US.


  • Early signs are broadly positive. A few companies with odd quarter-ends have already reported results, and although not fully representative of the S&P 500 their reporting bodes well. It’s also noticeable that there have been unusually few profit warnings leading up to the reporting season; companies must seemingly have fewer skeletons in their closets. 

  • Analysts are also feeling more upbeat about results than normal. It’s typical that analysts cut their estimates by, on average, around 4% heading into results. This time round the downward revision was only half that.


  • Analyst consensus is predicting earnings growth of around 7% for the S&P 500, or 4% excluding energy. Adding the historical average amount that companies beat consensus (3.5%) would take Q2 growth to around 10%. Though given the lack of downward revisions the size of the beat could also be a bit smaller than usual.


  • One of the best things to say about Q2 is that things look particularly good for sales. Sales growth is forecast to be close to 5% and sales forecast revisions have been running at the highest pace since 2011, even better than earnings revisions. This is good news because revenues are more difficult for companies to fudge, so we put a higher weight on strong revenue growth than earnings per share numbers. 


  • The European earnings season traditionally kicks off a bit later than in the US, but the same general trends should apply here as well. Consensus forecasts are for around 10% growth over Q2 last year, but as there is less of a pattern of European earnings beating consensus estimates growth rates should end up around similar levels on both sides of the Atlantic.


Summing all of the above up into two conclusions:

  1. Q2 results should be very good, but not as good as last quarter
  2. Good results don’t come as a surprise, so the macro impact should be limited
  3. The direction of equities will depends more on newsflow relating to forward-looking earnings (e.g. PMIs, tax cuts, currencies and commodities). Our base case remains 5-10% total returns for global equities over the next year