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Corporate earnings beat expectations as US stocks hit fresh records

Monday 11th November 2019

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Those in awe of global sharemarkets moving back into record highs may be somewhat reassured that, with 90 percent of S&P 500 companies having reported their September-quarter results, earnings are running well ahead of expectations.

That also helps explain why US interest rates have rebounded in recent weeks, the yield on 10-year Treasuries, for example lifting from its 1.42 percent low in September to the still low rate of 1.93 percent on Friday, and why the Federal Reserve has likely done with cutting rates, at least for now.

Fed chair Jerome Powell will be testifying before congress on Wednesday and Thursday and will likely repeat the message of the Fed's last meeting when, after cutting the federal funds rate to 1.5-1.75 percent, it said the bar for any further easings is high.

That message should take some of the pressure off New Zealand's Reserve Bank which will announce its latest monetary policy decision on Wednesday.

With economists divided on whether RBNZ will cut its official cash rate again following cuts from 1.75 percent to 1 percent since May and the market pricing in a 64 percent chance of a cut at the end of last week, the market is likely to show a strong reaction whatever the decision.

Mark Lister, head of wealth research at Craigs Investment Partners, says the bank has a number of reasons for feeling less pressure to cut the OCR than a month ago.

“They don't have the pressure coming from the Fed because the Fed has moved to the sidelines, global sentiment seems to have rebounded with the US share market at records and we've seen a decent uplift in milk prices,” Lister says.

Dairy products account for about 20 percent of New Zealand's exports and the 3.7 percent increase in the Global Dairy Trade Index last week was the fourth consecutive increase.

Lister says the index is now just 3.1 percent below the May 2019 high and 20 percent higher than a year ago.

“If RBNZ wants a reason to keep it's powder dry for now, it's easy to find one,” he says.

Heading into the September-quarter US corporate reports, analysts had been expecting an average 4.1 percent fall in earnings but actual earnings have fallen 2.4 percent on average.

“It was definitely better than expected pretty much across the board. You've still got earnings slipping from where they were a year ago, but to a lesser degree than thought. So the corporate sector is still seeing a slowdown,” says Lister.

Of those reporting, 75 percent have beaten expectations and the 12-month return has averaged 11.2 percent.

That helped fuel the S&P 500 Index's 0.9 percent rally to a record last week, taking its gains year-to-date to 23.4 percent.

New Zealand's benchmark S&P/NZX 50 Index has gained the same amount so far this year, although it isn't directly comparable because it includes dividends, unlike the US index.

Global household names yet to report include Britain's Vodafone and Burberry, China's Tencent and Walmart in the US, although they are unlikely to change the picture of slowing but still healthy growth.

Investors have a few results in New Zealand to watch, notably Mainfreight and Infratil's first-half results on Wednesday and Goodman Property Trust's first-half and Sanford's annual results on Thursday.

Outlook comments from the annual meetings of Heartland Group and Contact Energy on Tuesday and Wednesday respectively will also be worth watching.


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