Global stocks pin hopes of year-end rally on earnings resilience

LONDON – Investors are primed for any bit of good news to help them forget a brutal quarter for stocks that took this year’s value destruction to US$24 trillion. A resilient corporate earnings season might give them that.

The MSCI All-Country World Index just wrapped up its third straight quarter of declines, the first time that’s happened since the global financial crisis in 2008. The 7 per cent drop came as investors grappled with persistently high inflation, a surging dollar and jumbo interest-rate hikes across the world that threaten to choke economic growth.

Alongside that, analysts have slashed profit estimates, and a chorus of US and European companies – including car giant Ford Motor – has issued early warnings about third-quarter results.

But one view is that this could set firms a lower bar to clear, and fuel a much-needed recovery in stocks that are currently at levels last seen nearly two years ago. “Investors have to ask themselves how much of the bad news has already been priced in,” said Ron Saba, senior portfolio manager at Horizon Investments.

“Given extreme pessimism combined with reasonable valuations, the fourth quarter could give investors an opportunity to claw back some of their losses.”

History is an imperfect guide, but past stock performance bodes well for the quarter. The S&P 500 gained an average 4.1 per cent in the final quarter during the past 20 years, while the MSCI has posted a fourth-quarter decline only three times over that period.

That’s not to say companies will get through the season with glowing report cards. There’s still plenty of hurdles that could cement 2022’s reputation as a year to forget.

For one, the era of higher costs is making it difficult to defend profitability. Firms also face tighter monetary policy from the Federal Reserve, the Bank of England and others as central banks keep a laser focus on taming inflation. On top of that, there’s the war in Ukraine, a severe energy crisis in Europe, and economically damaging Covid restrictions in China.

US companies with a large international exposure are at risk from a stronger dollar, as underscored by Nike’s disappointing earnings report on Thursday. European and UK importers, on the other hand, are dealing with much weaker currencies. UK conglomerate Associated British Foods and Swedish fashion retailer Hennes & Mauritz both blamed the greenback for a bleaker profit outlook.

But the scale of recent analyst downgrades, as well as the market reaction to the early announcers, suggest that “some disappointments are already expected and possibly even priced in to some extent,” said Esty Dwek, chief investment officer at Flowbank.

A Citigroup index shows US earnings downgrades have consistently outnumbered upgrades since early June, while global 12-month forward earnings have been revised down every month in the last quarter. Both the S&P 500 and Stoxx 600 are in bear markets – defined as a drop of 20 per cent or more from recent highs.

The big question in the lead-up to the next earnings season is whether this will be enough. Strategists at Goldman Sachs Group and BlackRock have warned that estimates are still too high and that “we’re going to see pretty substantial reductions for 2023.”

Yet, others see reason to believe earnings can hold up for a while longer.

Bloomberg Intelligence analysts expect S&P 500 earnings to have risen 2.9 per cent in the quarter, helped mainly by the energy sector. Gina Martin Adams, BI chief equity strategist, said the absence of “economic excesses” – such as the indebtedness seen before the 2008 recession – could insulate US demand from a severe decline.

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