Earnings season only pouring 'fuel on fire' for stocks

Upcoming reports on companies' profits may fail to fulfill high expectations

Apr 11, 2018 @ 10:38 am

By Bloomberg News

Don't pin your hopes for stock markets in the U.S. and Europe on first-quarter profit updates.

That's the message from London & Capital's Roger Jones, who argues that now is not the time to load up on risk assets. As investors prepare to shift their focus from macroeconomic drivers to earnings reports, they may do well to temper their expectations, he says. His position counters that of steadfast bulls who say profit momentum will help underpin equity markets going forward.

"I do not think the first-quarter numbers are going to be great against expectations — which are quite high," Mr. Jones, head of equities at the wealth and asset manager, said in emailed comments. "We've had weather-affected first quarters in Europe and the U.S. There is a risk that rather than turning markets around, this will pour fuel on the fire."

In Europe, the reporting season will kick off amid a marked slowdown in economic growth momentum, which has clouded the outlook for the region's stocks and threatens to curtail the rally in cyclical shares. A Citigroup Inc. gauge measuring economic surprises in the U.S. has also retreated in April, though it's still in positive territory, unlike its euro-area peer.

Meanwhile, equities in both regions have been struggling to make up the losses incurred since a broad sell-off began in late January. Escalating trade tensions between the U.S. and China have further dented sentiment, though the worst fears of a full-blown trade war have subsided in recent days.

"It does not feel like the time to be moving up the risk scale — remaining with stable, resilient companies with good earnings and high visibility is the most prudent course of action," Mr. Jones said.

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