Market Update 20.07.15

IpsoFacto Investor market update

Away from the Greek drama

US company earnings are likely to be in the spotlight this week with some heavy hitters reporting the April-June period; Apple, AT&T and Microsoft on Tuesday, Boeing on Wednesday and Amazon on Thursday. Apple can practically move the S&P on its own, because of its high weighting in the index. So far, according to Factset, of the 24 S&P companies that have reported for Q2 2015, 16 have reported earnings and 12 have reported sales above the average analyst estimates. Of course as usual, this is beating estimates that have been revised down over the period. At the end of March the Q2 forecast for earnings decline was 2.2%; now the forecast decline has grown to 4.4%. Companies try to guide analyst forecasts down so that they can end up beating them.

So the decline in earnings may not be quite as bad as the negative 4.4% currently forecast. Even this forecast is highly skewed because of the impact of lower oil and commodity prices on the energy and mining sectors. Thus, if the Energy sector is excluded, the estimated earnings growth rate increases to +2% from -4.4% (Factset). We like to look at what is happening to revenue (as opposed to earnings), because this may give a better picture of trends in the economy. Overall, the year on year revenue decline for the second quarter is forecast to be -4.2%; but again this is distorted by Energy, where the decrease is a massive 38.4%. The Consumer discretionary sector, presumably the best guide to consumer spending power, is forecast to have a year on year increase of 2%, while revenue growth is headed by Health Care and Financials, with 7% and 3.4% respectively forecast.

Together with the US June non farm payrolls which increased by 223,000 versus 231,000 forecast, this revenue growth broadly confirms the picture we had previously; the first quarter US GDP decline being something of a blip, influenced by savage cuts in oil and gas expenditure, and the not too hot/not too cold (goldilocks) nature of the recovery continues. Whilst this may leave the financial forecasting community frustrated at lack of clarity as to when interest rates go up (although some time later this year remains the favourite), for the moment it should be sufficient to support equity markets. For the latter to make real progress, however, there needs to be more momentum in the recovery – of which rising interest rates would be an indication. The danger remains that the Fed moves too quickly to raise rates and cools down the economy unnecessarily.

But Greece is still the word

The deal with Greece may have cleared its first hurdles of agreement by both the Greek and German parliaments, but since most people think that the deal is unworkable anyway, expect both further ructions and some concessions, as regards debt relief. Angela Merkel seemed to be striking a slightly more accommodating tone over the weekend. Nonetheless, this is likely to be an ongoing sore for markets, although with Europe now on holiday, there may less headline news. The important thing is how much the Greek farce has sapped consumer confidence in the rest of the eurozone; 2014 was the best year for real wage growth in Germany since 1999 (partly because inflation was so low) and the GfK German consumer confidence index has been climbing steadily. Whilst Greece may be an irritation, hopefully it is not of an order to deter the European consumer too much.

Exchange rate excuses

As many prepare for their holiday and look with some interest at a pound now buying 1.43 Euros, euro weakness is likely to be a theme in the UK earnings season, which gets underway towards the end of the month. This time last year a pound was worth about 1.24 euros; so a lot of UK companies with European operations will report revenues impacted negatively by this difference. As with the US, the decline in oil prices compared to last year will also be prominent in the headline UK reports. The other side of euro weakness should see European companies with international operations reporting good growth in exports.


Despite Greek noises off and China share volatility – which seems to have quietened down for the moment – the scenario of a global economy still recovering slowly remains in place. Our model still supports the core asset allocation of 70% equities, 15% bonds and 15% cash. We would like to see a strong move up in bond yields (the ten year gilt yield is currently 2.2%), assuming equities don’t sell off as result, before considering a change.