US equity outperformance resumes

August 04, 2020


In recent weeks, US equity markets have resumed their year-to-date outperformance over the rest of the world.


It may appear counter-intuitive that the US is outperforming at a time when there has been a resurgence in Covid-19 cases in several US states, with the Republicans and Democrats struggling to agree on the next, and needed, stimulus package. All these increase the downside risks to the US recovery but yet US equities are outperforming again, why? We think it is down to the current earnings season in the US being a lot better than the rest of the world. Indeed, with 65% of S&P 500 companies having reported earnings, 85% of companies have beaten expectations, the highest ever ratio since Factset compiled the data from 2008. In contrast, only 63% of European companies have beaten expectations. The average percentage of beats on the EPS growth is currently around 20%, the highest ever and a much higher ratio than the rest of the world. A major boost to US operating and market performance has been tech and internet stocks, which reported excellent numbers last week (Apple, and Amazon to name but two).


There are two lessons to be learned from the above. First, sector and stock compositions are key drivers of equity market performance, and are the starting point of any regional analysis. Because of its more innovative nature, the US therefore commands higher weightings in portfolios. Secondly, the high percentage of beats in the earnings season highlights how far market expectations can be from reality. Market commentators often refer to valuations, focusing lazily on the multiple and much less on the denominator (profits or sales) which matters most in the end. The power of compounding growth is the most powerful force when investing in long duration assets such as equities. With earnings expectations having collapsed in recent months, markets have plenty of room to grow into their optically rich valuations in our view and we remain long equities.


EUROPE- European markets closed generally higher on Monday, sustained by earnings reports and positive economic data, with Germany the leading outperformer. Coronavirus remains at the forefront, with the European press highlighting a lack of adherence to social distancing rules amid a recent rise in infection rates across the region. On the macro-data front, there was focus on Purchasing Manager Index releases in the area. Eurozone final manufacturing PMI revised represents the first growth for the sector in 18 months. Survey compiler IHS Markit highlighted gains in output and new orders in July. Consumer goods saw their best performance in more than 18 months. The rate of job losses eased, although it is still greater than any time since 2009.

USA - US equities were higher Monday, with the Nasdaq setting another record and the S&P 500 extending last week's gains. Growth outperformed value again. Treasuries were little changed, with the long end a bit weaker. The dollar firmed against the major crosses. Gold finished up fractionally higher. WTI crude oil settled up 1.8%, a bit off best levels. There were some better than expected data, including a US ISM manufacturing beat. The White House and Congress are expected to agree to a new coronavirus aid package despite the recent impasse. Trump said he would take unilateral action if needed, although it is unclear what the president can do alone. The Fed Senior Loan Officer Survey for July showed tighter bank lending standards. Second-quarter earnings are still seen as a bright spot. Around 64% of S&P 500 companies have now reported, with 82% beating (lowered) EPS expectations by an average of around 22%.

ASIA - Asian equities are trading higher Tuesday. The Hang Seng is leading China market gains, while the Nikkei and Kospi are up over 1%. Mainland China reported another drop in coronavirus infections. US-China tensions continue to simmer, with TikTok the latest flashpoint. President Trump said he would not oppose TikTok’s acquisition by Microsoft, but he demanded a cut of the deal. China state media criticized the US pressure campaign against TikTok, saying Beijing will not accept the "theft" of the company.

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