Corporate profits “underpin the stockmarket directly”, says the FT’s John Authers, as we buy a company’s earnings stream when we acquire shares. So it is a pity that “profits look terrible”, especially in Europe. Based on results so far, second-quarter earnings in the pan-European Stoxx 600 index have slid by more than 11% year-on-year. In early July the figure being pencilled in was 3%.
On Wall Street, the constituents of the S&P 500 index are also struggling. They are heading for a fifth successive quarter of decline: most have now reported and the average annual fall is 3%. Sales have slid marginally. “Anaemic corporate performance such as this does not sound like the stuff of which stockmarket records are made.”
Still, this could be the bottom of the earnings cycle. As we noted last week, the European economy is very gradually improving, while US-led global growth is also looking firmer. As for US profits, the strong dollar trend seen in last year’s first half will drop out of the annual calculations, while oil’s recovery will also help – although if the renewed fall of the past few weeks endures, this effect will be reversed.
The broader point, however, is that fundamentals can be eclipsed for long periods by central-bank action – and yet more of this is likely from Europe and Japan in the next few months, while the US Federal Reserve is in no hurry to raise interest rates from historic lows. Ample liquidity always flows into markets, so these days we don’t really need earnings to have a bull market.