Quick Take | US earnings broadly in line with long term trends; tariffs & currency key factors to watch

Anubhav SahuMoneycontrol Research

Highlights:
- Aluminum: Deficit remains but downward revision in demand
- Banks: Fixed income trading impacted due to market volatility
- Netflix surprises on subscribers addition after a price hike for a key plan
- About 60 S&P 500 companies report earnings this week
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Alcoa: Downward revision in global aluminium demandFor years, Alcoa’s result has been an early trend indicator for the US earning season. This time it brought in assessment of the global aluminium market and an impact of higher tariffs imposed by the Trump administration. The company projects global aluminium deficit ranging between 1.7 million and 2.1 million tonne, which is higher than the deficit seen in 2018 (1.7 million tonne). While aluminium supply-demand is expected to remain in balance in China, most of the deficit is anticipated from rest of the world. Downward revision in global aluminium demand (3-4 percent growth versus 4 percent earlier) doesn’t augur very well in the near term.

Tariffs: Domestic gain partially offset by international operationsAlcoa mentioned that the Trump tariffs have helped its overall business on a net basis. The company produces 28 percent of its aluminium from Canada plants and hence was impacted by tariffs while importing the same to the US. However, import tariffs has helped the company in terms of higher realised price and demand from US smelters.

Here it is noteworthy to mention a report by the Economic Policy Institute, which mentions that the US aluminium industry has announced investments ($3.4 billion) to restart or expand at 26 facilities across the country.

Banks: Financials have posted a mixed set of earningsJP Morgan and Citi witnessed a double-digit drop in fixed income revenue, mainly reflecting the volatility in treasury and bonds towards the end of Q4 CY18. While the fixed income disappointment was seen for Goldman Sachs and Bank of America as well, these two giants were able to more than compensate in their M&A advisory and consumer banking businesses, respectively.

Media: Netflix continues to script digital acceptabilityNetflix posted upbeat earnings aided by higher-than-anticipated paid subscribers (8.8 million) globally, raising the aggregate count to 139 million. The management also guided for better-than-expected outlook on subscriber additions in Q1 CY19. However, the most striking update from the company was a sharp price increase in its most popular plan to $13 per month (from $11 per month).

Earnings and sales beats so far, but a bit lower than historical averagesMore than one-fifth of S&P 500 companies have reported their Q4 CY18 earnings, wherein 76 percent of companies posted earnings beat, which is a shade lower than the average of the past four quarters (78 percent). In terms of sales beat, 58 percent of companies reported sales higher than consensus expectations, which is below the average of the last four quarters (72 percent), but broadly in line with the long term average (around 60 percent).

Currency and raw material cited as concernOf the companies that have reported results, most have cited currency and raw material inflation as aspects to watch out from a margin perspective.

Downward earnings revisionsProjected earnings growth for Q4 CY18 has softened a bit from the start of the year (10.6 percent versus 12.2 percent YoY). While improvement is seen in industrials; financials, IT, materials and energy sectors have seen downward revisions. For CY19, analysts are projecting single-digit earnings growth of 6.5 percent and revenue growth of 5.3 percent as benefits of fiscal stimulus fade away. Earnings are expected to be led by industrials and consumer discretionary in the current year. In the week gone by, about 60 S&P 500 companies have reported their results.

The S&P 500 is currently trading at a 12-month forward price-to-earnings of 15.3 times, which is at a slight premium to its 10-year average of 14.6 times.

Consensus expectations on growth

Source: Factset

Near term event: Round two of US-China trade talksOn the macro policy development, the US-China trade talks remain a key event for US corporates. Wall Street Journal said the US might go soft on tariffs in its next round of talks on January 30-31. There is a likelihood of a rollback of some of the tariff hikes last year. However, the US government has officially denied these developments.

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