Investors say a sharp increase in consumer spending in China after Beijing lifted restrictions due to COVID-19 will help soften the quarterly results of the world’s largest companies. However, analysts suggest that the US and Europe are approaching a corporate recession.
Fears are growing that tightening credit conditions will hit the global economy. But recent data and upbeat comments from major companies such as Europe’s most valuable listed company, LVMH, about doing business in China give investors some cause for optimism.
That could help extend a two-month streak in global equities after the March banking turmoil forced investors to cut earnings estimates.
Refinitiv I/B/E/S data points to a 2.5% decline in first-quarter earnings growth for STOXX 600 companies compared to a 5.4% growth forecast before the banking chaos.
In the United States, where major banks have already reported their first-quarter results, S&P 500 earnings fell 4.7% for the quarter, an improvement from an expected 5.2% drop seen earlier in April.
However, this will be the second consecutive quarter of declines, marking a corporate recession. The data shows that Europe is also heading into recession, with revenues expected to fall 5.4% in the second quarter.
Investors polled by Reuters are more optimistic than mainstream forecasts suggest, saying not only that growth has rebounded strongly in China, but that growth is holding up better than expected in the US and Europe.
“Overall there is room for a positive (profitable) surprise, supported by improved economic momentum, especially in China, but (also) in Europe things are not as bad as expected,” he said. James Rutlandfund manager of Invesco in London.
Barclays European Equity Strategy Representative Emmanuel Kau argues that there are signs that inflation is easing and interest rates are mostly raised, but markets “remain on the defensive.”
“People have been preparing for the worst for months, and the worst has yet to happen,” Kau said.
In February, eurozone producer prices fell for the fifth month in a row, and polls showed that the bloc’s economic recovery unexpectedly accelerated this month.
US consumer prices rose in March at the slowest pace in nearly two years.
Fears of a major banking crisis eased after major US banks Morgan Stanley, JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc all posted better-than-expected first-quarter earnings.
In Europe, where major banks Barclays, Santander, Deutsche Bank, UBS and Credit Suisse are reporting results this week, financials could determine the fate of overall market earnings, Barclays strategists believe.
Just a few weeks ago, at the height of the banking turmoil, markets were bracing for a deep downturn and even for central banks to reverse course and cut interest rates. But still high inflation means major central banks are expected to continue raising rates through at least May.
The prospect of higher borrowing costs has been a boon for banks such as Spain’s Bankinter, which reported a sharp rise in net income as lending income rose.
European financial reports are expected to report a 31% rise in first-quarter earnings, according to Refinitiv.
But investors are also watching for signs that credit tightening is having an impact: consumer goods majors Nestle, Durex maker Reckitt and Unilever reported results this week.
Investors believe that if consumer demand holds up and input costs fall, this combination could improve margins.
On Friday, Procter & Gamble Co raised its sales forecast and beat estimates for quarterly results as price hikes boosted margins and offset the damage from consumers switching to cheaper brands.
Stefan Ecologlobal equities strategist at brokerage Tradition, expects earnings in the US and Europe to beat expectations as he believes valuations are too low.
However, margins could start to fall as many companies find it difficult to continue to pass on higher costs to consumers, Ecolo said.
Better-than-expected results from luxury eyewear maker EssilorLuxottica and Europe’s largest technology company ASML Holding NV, as well as iron ore producer Rio Tinto, raise hopes that demand will remain more resilient than analysts feared.
But the world’s largest iron ore producer has warned of “persistently high” inflation in the US, and tightening credit conditions will put pressure on economic activity across the board.
QoQ sales growth for automaker Tesla Inc was modest despite price cuts due to rising competition and a bleak economic outlook.
Higher wages in Europe, which could partially undermine corporate margins, are likely to support demand, Invesco’s Rutland said, as employment data point to a still-tight job market.
“You have seen positive wage negotiations. Right now in Europe we have a unionized workforce that is coming in a little more behind than perhaps we are seeing in other countries,” he said.
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