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Yearning for earnings

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Equities rose in sterling terms, led higher by Japan (+4%)
  • Bonds advanced between +1-2% in local currency terms

A bad week for

  • The US dollar weakened -1.6% on a trade weighted basis
  • Sterling weakened against the euro and yen

Corporate earnings

The coming reporting season for corporate earnings could be a key test for equity valuations. Earnings are tied to nominal growth conditions, and a period of slower economic growth at the end of 2022 contributed to downgrades to earnings forecasts. However, even with growth estimates having been downgraded, there is scope for further cuts to expectations. In addition, 2023 is expected to be a weak year for nominal global growth as real GDP growth slows. This could weigh further on earnings. Because corporate earnings are a factor used to value equities, this could negatively impact asset prices. However, this may, in part, be offset by an end to the current cycle of monetary tightening.

US inflation

US Consumer Prices Index (CPI) continued slowing dramatically in November. Headline inflation slowed to 6.5% year-on-year, compared to 7.1% in November. Falling energy prices helped to pull down the headline rate, now only 0.5% higher than a year ago. Core goods inflation also slowed, falling -0.3% on the month, having been one of the stronger segments of the CPI basket after the pandemic. Services inflation remained more resilient, with shelter costs rising by 0.8% on the month. However, given weaker real estate prices, this component is expected to weaken in coming months and, excluding shelter, services inflation is more subdued. The downward trend in headline and core inflation will be welcome news to members of the US Federal Reserve’s Open Markets Committee, who have advocated for a slower pace of monetary tightening to allow the measures already put in place to take full effect in the economy. Expectations for the February committee meeting are now for a 0.25% rise in the policy rate.

UK economy

GDP data showed that the UK likely avoided a recession at the end of 2022, despite strong headwinds facing the economy. Growth in November was 0.1% month-on-month, weaker than 0.5% in October, but stronger than the -0.2% decline expected by analysts. This means that the economy only needs to fall by less than -0.4% in December to avoid a quarterly decline. While November growth was stronger than expected, this was boosted by the Football World Cup, which helped hospitality output increase by 1.5% in November. Healthcare also performed strongly, rising by 0.9%. While Government help for households is likely to continue to support consumption spending into 2023, growth is expected to be around -1% this year. However, further declines in energy prices could help to ease the drag on real incomes sooner than expected.

China economy

Last week’s China trade data painted a gloomy picture, despite the positive market reaction to China relaxing Covid-19 restrictions. December’s data showed exports falling by almost 10%, the most since the Wuhan lockdown in early 2020. Given that prices have softened, this likely meant a further fall in export volumes. Imports declined by -7.5%, but they should rebound following the reopening of the economy. However, exports reflect a weak demand environment overseas, and could continue to decline into the second half of the year.

EU-US relations

US industrial policy has caused tension with European leaders. The 2022 Inflation Reduction Act sought to boost US manufacturing in green technologies, including electric vehicles. However, European leaders fear some of these measures, including tax credits for electric vehicles assembled in the US, could tempt European firms to divert manufacturing investment to the US. In response, EU competition Chief Margrethe Vestager has proposed changes to current state aid rules. France is championing changes, raising “serious concerns about the EU’s ability to attract or maintain productive investments in the key sectors of the climate transition."

 

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