Alpha outlook ahead of the earning season

By July 12, 2018 05:07

Alpha outlook ahead of the earning season

The weekly brief

The Q2 earning season starts in a week with the reports of major banks. Earning seasons are important moments for stock-pickers. They need stock fundamentals to evolve as they expected, and stock returns to move consistently with fundamentals.

Our monitoring of the Q2 environment does not suggest a game-changing season. The manufacturing and retail pulses were buoyant in the U.S., while a higher dollar would put pressure on exporting companies. In Europe, the cycle was less supportive, but economic surprises stabilized and the EUR depreciated. Analyst expectations will be challenging to beat in the U.S. (greatest in energy, materials, telco and tech), but companies’ profit warning should result in fewer disappointments (more warnings in tech and industrials than usual). While this season might not be decisive for beta, it will give a valuable insight on the alpha backdrop. 

We anticipate the alpha environment in the U.S to remain mixed. The dominant themes, which provided opportunities early this year, are now ageing or constrained. The tax reform is now well priced, and, for instance, bank deregulation prospects are offset by a flattening curve. Stock dispersion, a measure of arbitrage potential, seems appealing, but it is concentrated in few sectors. Additionally, we fear that just like the previous two quarters, improving fundamentals might not be rewarded in prices. Uncertainties and doubt about the sustainability of earning growth would overwhelm micro moves. The strong corporate activity remains as the most interesting pattern in the U.S., best exploited in our view by deep-value strategies. 

By July 12, 2018 05:07


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