Earnings season: Improving results
The earnings season in the US is in full swing, with roughly half of the S&P 500 companies (64% of earnings) having reported their quarterly results so far. After a rather mediocre start, incoming earnings reports were stronger last week: the beat rate increased from 73% to 78%, which is above the 10-year average of 75%. On aggregate, Q3 earnings have surprised to the upside by 7.7%, driven by the mega-cap companies in the information technology and communications space.
As a result, consensus is now expecting Q3 earnings growth to end at +2.4%, which compares to - 0.4% at the start of the season. As such, this would mark the first quarter of positive year-on-year earnings growth since Q3 2022 and an end to the earnings recession.
As such, compared to the US, European equities are still in the midst of an earnings recession.
Growth weakness sustained globally
While composite PMIs confirm a solid outlook for the US, the eurozone and the UK struggle to digest higher interest rates.
The latest preliminary readings of the October composite purchasing managers’ indices (flash PMIs) suggest that growth weakness is set to continue and may deepen in some regions, especially in the eurozone. While the slump in manufacturing persists, a further deterioration in services amplified the weak expectations for economies overall. Only US data improved slightly and remained above the 50 index points that mark the critical threshold to expansion.
The flash PMIs have therefore underpinned once more that the US economy is digesting higher interest rates better than its European peers. For the eurozone, the latest readings came in below 50 for a fifth consecutive month, hitting a new record low since November 2020. This slashes previous hopes that the slump might have bottomed out.
Meanwhile, the outlook for Asia worsens. Positive momentum has been fading in Japan, where PMIs dropped below 50 for the first time in ten months. Australia fell back below 50 suggesting that the optimistic September data was an outlier rather than the beginning of an upward trend.
Genomics: Biotech sector in a post-pandemic slump
While the US economy has shown remarkable resilience and continues to cope well with higher interest rates, such optimism has not yet found its way to the healthcare sector. This can especially be seen in the realm of biotechnology (biotech), as US stocks here underperform the broader market.
The Julius Baer Next Generation Genomics index is down nearly 28% year to date, the S&P Biotechnology index by 27%, and the Nasdaq Biotechnology index by nearly 16%. In contrast, the S&P 500 has grown around 10% during the same period. In other words, the year of the widely-expected biotech comeback has not materialised.
There are several factors that continue to weigh on biotech’s growth prospects. Lingering regulatory pressures associated with drug pricing in the wake of the US Inflation Reduction Act raise concerns about the potential stifling of innovation in the development of new drugs. The sector also faces challenges in securing funding due to a shift in investor focus away from Covid-19 vaccines and antiviral treatments. High interest rates also impair the sector’s ability to raise funds. Although biotech stocks are in a post-pandemic slump, the ability to commercialise new drugs serving unmet medical needs remains a key long-term value driver for growth.
What does this mean for investors?
A few weeks ago, we revised our outlook for the eurozone down as we believe growth could stagnate over the second half of 2023 and into the first half of 2024. However, we do not expect the eurozone to fall into a recession, as major imbalances that could trigger a downward spiral remain absent and higher real incomes should support private consumption.
The days ahead are also packed with relevant information that will help investors assess their positioning into the final two months of 2023. The earnings season will see more than 350 earnings reports worldwide. Then the central banks will have a say too: the Bank of Japan goes first, followed by the US Federal Reserve and the Bank of England. While no rate action is expected from any of these, the framing of their statements will be scrutinised for hints of ‘where to next?’ So, going forward, patience will still be needed.