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Asset Allocation Observatory: US equity earnings & China ‘still not enough’

By Giorgio Broggi, Quantitative Analyst, Moneyfarm

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Another good week for markets, with two key main characters: the earnings season in the US and China.

US earnings season 

After the latest inflation data, which keeps pointing to a normalisation, the market focus is switching more and more towards growth. In particular, for the US, markets are expecting a roughly 11% growth in Earnings Per Share (EPS). The ongoing earnings season is key to understanding how reasonable this is and, to put it simply, whether US equity is too expensive or not. After a weak start, this earnings season is supporting optimism. Looking at data as of 2 February, 46% of companies reported, with 72% of these posting higher-than-expected earnings (lower than the 5-year average of 77%) and aggregate year-on-year growth for the fourth quarter of 2024 of 1.6% (better than the 1.5% expected at the end of December). These numbers are not extraordinary, especially considering that the surprise on aggregate earnings was only 2.6% compared to the 5-year historical average of 8.6%, but they certainly support the markets’ optimism. This is also demonstrated by the price reaction, in line with historical averages (although a little worse in the event of missed estimates) and the adjustment to expectations for the first quarter of 2024, which were adjusted downwards ‘only’ by 1.4%, compared to a 5-year historical average of 2.1%.

Source: Factset

In short, an earnings season that starts on a positive note and gives new life to the stock rally. As 2023 teaches, pessimism tends not to pay off in the medium and long term, and betting against the unstoppable progress of humanity remains the worst of the alternatives.

China – still not enough

The Chinese government has announced two key supporting measures in the last couple of weeks. The first measure aims at supporting the real economy and consists of a cut in the rate of required reserve that banks need to keep in their accounts, effectively increasing the amount of liquidity in the system. The second, interestingly, is targeted at supporting financial markets and directly the price of Chinese stocks. We think that the first measure is simply not enough to solve Chinese issues. As for the second measure, it consists of both curbing short-selling and directing off-shore funds from state-owned companies towards investing in Chinese stock indices (it could potentially mobilise about $300bn). The main Chinese market indices have reacted well – at least slowing down the last six months’ drop in price. Overall, we think that these market-supporting measures are not enough to reassure foreign investors and, crucially, do not really address the key underlying issues of the economy. The cut of the banking rate of required reserves, even if it goes in the right direction, is also not enough to revamp consumers and stop the bleeding of the real estate sectors, which printed a horrific -34.6% for YoY new homes sales in December.

Giorgio Broggi: Giorgio joined Moneyfarm as a Quantitative Analyst in December 2021 and he is a member of the Investment Committee. Prior to joining the company, he worked at Barclays Wealth Management and S&P Market Intelligence, gaining expertise in Funds Research and ESG Investing. Before starting his professional life, he successfully completed a double-degree at Eada and EDHEC Business School, obtaining two Masters in Finance and specialising in factor investing and portfolio construction. He is a CFA charterholder.

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