Weekly recap
What happened in markets
The Australian sharemarket improved last week, ahead 2.5%, boosted by both positive domestic and international economic datapoints. Most notably, employment in Australia came in much stronger-than-expected, with 58,200 jobs being added to the economy, well above the 17,500 estimated. While the ramifications for inflation are perhaps less certain, this strong employment data seemingly helped spur local shares higher. However, not all sectors participated in the rally, with weakness seen in the Materials (-1.3%) sector being caused by ongoing softness in metals prices, specifically iron ore.
US sharemarkets rebounded strongly last week, up 3.9%, more than recovering from anxiety brought about in the week prior, due to a surprisingly weak July jobs report. The rally was triggered by the Producer Price Index on Tuesday, which showed that wholesale prices had risen by less-than-expected in July. This was then followed by a slew of positive economic data, with the Consumer Price Index on Wednesday lower, while Retail Sales and Jobless Claims on Thursday were also better. This led the CBOE Volatility Index, known as the 'Fear Index', to drop sharply to 15.2, well below the 20-year historical average of 19.1. Looking forward, all this data led market participants to increase interest rate cuts expectations for the US Federal Reserve’s upcoming September meeting.
European sharemarkets also strengthened last week, after what was their most significant weekly advance in around three months. Market optimism was largely derived from positivity in US economic data, despite European datapoints being mixed. The Eurozone’s June quarter Gross Domestic Product was in-line with expectations, though industrial production in June missed, weakened by softness in Germany. Meanwhile, employment and Retail Sales in the UK were better-than-expected. All in all, the STOXX Europe 600 finished up 2.5%, with the Basic Resources (-0.4%) sector weaker and the Travel & Leisure (4.1%) sector stronger.
Stock & sector movements
What caught our eye
A few weeks ago, we wrote about the US earnings season, which kicked off in late July and is nearing its end. As mentioned, these company reports are crucial to investors, as they provide insight into the health of business conditions, how companies have fared and provide the opportunity for management to adjust their projections.
As of late last week, 93% of US S&P 500 companies had reported their June quarter earnings. Overall, things have been positive, albeit to a lesser degree than recent history. That’s to be expected though, given the unprecedented increase in interest rates, which sought to moderate the enormous economic growth experienced post COVID-19. According to FactSet, of the US companies that have reported, 79% beat earnings expectations. Surprisingly, this was above the five and ten year historical averages. However, those that did outperform did so to a lesser degree compared to the last several years.
Another interesting insight has been that market participants have rewarded positive surprises by less, while punishing negative surprises by more. For example, though Amazon reported positively, with earnings per share (EPS) of $1.26 (versus consensus estimates of $1.03), its share price actually decreased by around 10% in the following days. Part of this can be attributed to Amazon’s September quarter guidance, which was a bit softer. Hence, guidance is clearly important, so how have US companies guided at the aggregate? Quite well actually, with 46% of those that provided EPS guidance being better-than-expected. This was again a bit better than recent historical averages.
Below shows the sector breakdown of actual earnings and estimated earnings. Communication Services was the most notable and only laggard, weighed down by Warner Bros. Interestingly, the Information Technology sector surprise was weaker than average, though we suspect this was due to the high bar set by investors amid Artificial Intelligence optimism.
Some highlight earnings results from the Cutcher & Neale International Shares Model Portfolio included:
- Pharmaceutical company Eli Lilly smashed earnings expectations, after it successfully expanded supply of Mounjaro and captured more of the outsized demand for GLP-1 medication. Notably, this contrasted its main GLP-1 competitor, Novo Nordisk, who struggled to improve supplies.
- D.R. Horton reported higher earnings, as the homebuilder managed to increase sales, despite higher mortgage rates, thanks to its affordable price point strategy.
- Gold miner Agnico Eagle Mines beat production and sales estimates across several of its projects, with earnings supported by elevated gold prices.
In summary, more companies in the US have surprised on the upside this June quarter earnings season, despite higher interest rates, though this upside was somewhat limited. We saw that investors punished misses by more and that guidance was important, signalling increased caution.
The week ahead
A relatively quiet week for Australian economic data, with the RBA’s August monetary policy meeting minutes being the main release. The central bank left its cash rate target unchanged at 4.35% for its sixth consecutive meeting in August and largely ruled out an interest rate cut anytime soon.
Internationally, US new and existing home sales data for July will become available, giving us a read into the health of the housing market, access to financing and household confidence. In the Eurozone, we will better understand the degree of weakness seen in recent industrial production reports via the release of Purchasing Managers’ Indexes for August.
Portfolio Company Reports
