What’s Going On Here?

Computing giant IBM saw its stock price rise 3%, and it isn’t the only stunner on the catwalk. But are positive surprises really so in fashion this earnings season?

What Does This Mean?

• IBM’s revenue grew (just) last quarter, thanks to a new mainframe model and strong software sales from a trendy Red Hat. That was a relief for investors who’d dealt with falling revenue for the previous five quarters.
• Overall, 72% of US companies reporting fourth-quarter earnings so far have flaunted better-than-expected profits. Appearances can be deceptive, however. These earnings have only been 1.1% better than expected on average, compared to a 4.9% average beat over the last five years.

Why Should I Care?

For markets: Waning energy.

• Pleasant surprises are always more likely when expectations are low – and investors’ are lowering still.
  • Across the US stock market, analysts now expect last quarter’s earnings to come in 2.1% lower, compared to 1.5% at the start of January.
  • Pessimism is principally pumping from the energy sector, where profits are expected to drop more than 40% from a year before. A low oil price and increasing costs have already hurt support firms like Baker Hughes, with all eyes now on US production giants Chevron and ExxonMobil’s earnings.

The bigger picture: Who will buy?

• The low oil price is partly due to a general economic slowdown that’s also taking a big bite out of consumer discretionary companies.
  • The sector’s overall fourth-quarter profits are expected to end up 14% lower than in 2018, but there may be hope in store: luxury retailer Burberry raised its profit outlook thanks to particularly strong performance in China last quarter.
  • Nevertheless, the rise of a deadly virus in the country could yet dampen consumer demand…

Content source: Finimize. (2020) Chin Up. Available from: https://www.finimize.com/wp/news/chin-up/ [Accessed 23 January, 2020]