He says this is largely down to rising input costs, falling purchasing managers’ indices (PMI) and disruptions to Japan’s supply chain following the devastating tsunami.
For example, China’s PMI fell to 50.9 from 52 in May, as its manufacturing sector grew at its slowest pace in more than two years in June as the impact of government policies designed to prevent its economy overheating took hold.
Slight falls
In the UK, the PMI for June fell to 51.3 from 52 the previous month thanks to weak demand and a drop in its recent export boom.
“Expectations for profit margins to improve from already elevated levels are also hard to swallow when considering the declines in business sentiment and rising input costs,” Astorri says.
“This time last quarter estimates were much less optimistic and consequently surprised on the upside. There is less potential for positive surprises this time around, particularly as earnings surprises have been trending down over the past year.”
Earnings in the UK, according to Mark Deans, corporate client dealing manager at Moneycorp, are slightly higher for the first quarter of this year compared to last but real incomes are still falling.
Real returns
“Average earnings in the May quarter were 2.3% higher than in the same quarter last year,” according to Deans. “With CPI inflation running at 4.2% that is still not brilliant news for workers, whose spending power is falling by -1.8% a year, but it is a less gloomy picture than that painted a month ago when the erosion amounted to -2.5% a year.”
Astorri concludes that the net results for earnings are likely to disappoint, with a much greater disparity than usual between the winners and losers. Having said that, he says the key phrase to look out for in this next quarter is "margin squeeze", especially in the technology and autos sectors.
His preferred calls are the energy and materials sectors if any is to benefit from a reacceleration in growth and better risk appetite in the second half of the year.
