Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The quarterly corporate results season, which begins in earnest this week, will be important for a number of reasons. It’s likely to prove a high watermark for earnings growth owing to easy year-on-year comparisons with the same period in 2020. Lockdown conditions, shuttered businesses and low oil prices drove a temporary plunge in revenues and profits in the April-June quarter of last year.

According to latest estimates, companies in Europe may have increased their earnings even more strongly than their US counterparts last quarter. Analysts believe European corporate earnings may have been as much as 109% higher compared with the same three months a year ago, while US earnings are expected to have risen at a comparatively sedate 64% annual rate1.

As ever though, markets will probably be minded to look through high absolute numbers. Comparisons with market forecasts – which have been becoming more optimistic all year – will be far more important.

A weak dollar could feature as an issue. It will have crimped the earnings of large UK businesses that derive high proportions – as much as 75% for FTSE 100 companies – from overseas markets. It will also have exacerbated the upward pressure on input costs for US companies (a weaker dollar raises the dollar prices of commodities).

Earnings seasons can help “best in breed” funds and fund managers who emphasise businesses able to deliver positive earnings surprises in their processes to stay ahead of the game. However, the risks associated with these approaches can also be greater in the event that earnings fail to live up to expected levels.

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That may be especially true in the US at the moment, where shares are priced towards the upper end of their normal range. America’s stock market currently trades on almost 22 times the earnings companies are expected to make over the next 12 months, about the same as at the start of this year before the market’s latest rise2.

Given the risks posed by the spread of the Delta variant, China’s economic slowdown and rising inflation, that leaves markets potentially hinging – in the short term, at least – on the ability of companies to deliver on their promises and, perhaps, more besides.

Large US financials including Bank of America, BlackRock, Citigroup, Goldman Sachs and JP Morgan get the ball rolling this week. Look out for news of unneeded reserves built up during the pandemic being added back to banks’ bottom lines in the quarter, reflecting further improvements in consumer credit quality as America’s economy continued to grow.

With oil prices around US$73 per barrel during the quarter compared with about US$28 in the same period in 2020, energy companies are currently expected to report the highest year-on-year earnings increases, followed by basic materials (commodity) stocks and consumer discretionary companies3.

Don’t forget to look out for Tom Stevenson’s latest Investment Outlook for the third quarter, which will be published here tomorrow.

Source:
1 Refinitiv I/B/E/S data, 06.07.21, and FactSet, 09.07.21
2 MSCI North America Index, 30.06.21 
3 FactSet, 09.07.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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