Weekly recap
What happened in markets
The Australian sharemarket rose 0.5% last week, marking gains in five of the past six weeks. The Financials sector was among the best performers, climbing 0.9% as all major banks recorded gains. The Materials sector also rose 0.8%, contributing to the market's strong performance. However, the Health Care sector was the hardest hit, plunging 3.8% following weaker-than-expected company reports. Cochlear was a major drag, falling 14.9% after downgrading its full-year profit outlook. In economic news, consumer confidence remained largely unchanged in February, with the ongoing recovery in sentiment stalling in recent months. However, expectations for a rate cut provided some optimism, as consumers grew more hopeful about potential improvements in individual budgets.
US sharemarkets rebounded last week, with major indices posting gains after the previous week’s decline. The NASDAQ led the way, driven by strong performances from the major technology companies, particularly NVIDIA (+6.9%) and Apple (+7.5%). Elsewhere, semiconductors, Chinese technology, and homebuilders saw notable gains, while Health Care, Financials and Travel & Leisure lost ground. Artificial Intelligence-driven optimism for a broad earnings recovery aided investors risk sentiment. However, January’s Consumer Price Index report raised concerns after reporting hotter-than-expected inflation, potentially pushing the next rate cut to later in the year.
European sharemarkets extended their positive momentum last week, closing higher for the eighth consecutive week, with the STOXX Europe 600 reaching a new record. Sectors such as Automakers, Industrial Goods/Services, and Information Technology performed well, while Travel & Leisure, Utilities, and Health Care lagged. The market's focus was largely on the impact of potential US tariffs on European companies. Analysts warned that tariffs could significantly affect sectors such as pharmaceuticals, automobiles, and machinery. In the UK, economic data showed some positive surprises, with Q4 2024 GDP growth slightly outperforming expectations.
Stock & sector movements
What caught our eye
With much of the world focused on US President Donald Trump and his seemingly daily policy announcements, tariffs being the most notable of late, it’s easy to miss what’s happening on the ground at the company level. Yet, the latest US earnings season has delivered plenty of insights into how businesses are faring in this less certain environment.
Overview
As of now, 77% of the S&P 500 companies have reported their Q4 2024 results. The numbers have been quite healthy. According to FactSet, 76% of those reports exceeded expectations, which is around the 5-year average and above the 10-year average. However, revenue surprises were more muted. Only 62% of companies beat revenue forecasts, below the five-year average of 69%, indicating that while profits are strong, top-line growth is not as broad-based.
Sector Standouts
The Financials sector has seen the largest increase in earnings, posting a staggering 51.8% earnings growth, led by strong results from major banks like JPMorgan Chase, Goldman Sachs and Bank of America. This was good news for our International Shares Model Portfolio, given the Investment Committee increased its allocation to banks in response to Trump’s victory. Lower corporate taxes and potential for less regulation are highly supportive of the banks in particular.
Earnings growth from the Consumer Discretionary, Technology and Communication sectors were also much stronger, boosted by positive reports from Amazon, Meta, Disney and News Corporation.
On the other hand, Energy struggled, reporting a 27.5% earnings decline, largely due to lower oil prices year-on-year.
Market Reaction
Despite strong earnings, investors have been lukewarm in their response. Historically, stocks that beat earnings estimates tend to see a price boost. This season, however, the average price increase was just 0.5%, well below the 5-year norm of 1.0%. This suggests that some investors believe markets have already priced in strong results and/or are wary of what’s ahead.
With a forward P/E ratio of 22.1x, the S&P 500 is trading above near-term averages, suggesting valuations remain elevated. That makes future earnings growth even more critical in supporting stock prices. Along those lines, we believe this earnings season has delivered so far, with a blended earnings growth rate of 16.9% currently, ahead of the 11.8% expected.
The week ahead
Locally, all eyes will be on the RBA on Tuesday as they deliver their latest interest rate decision. In addition, there will also be the release of the Unemployment Rate.
Overseas, the UK Unemployment Rate, Retail Sales and Consumer Price Index will be revealed.
Portfolio Company Reports
Wade is the head of the Investment Services division at Cutcher & Neale and has over 10 years of industry experience in accounting and investment advisory roles.
Ryan is our Portfolio Manager, bringing over 15 years of experience in managing multi-asset investment portfolios with a specialisation in fundamental equity analysis.
