As it turns out, it was hard to gauge what impact the mixed reaction to Apple’s latest gadget would directly have on the company’s share price, with US markets as a whole having had something of a turbulent week.
Again, it has been the big-picture macro factors that have dominated sentiment, from a dollar rally to uncertainty around the Fed’s next move in potentially raising rates.
With the S&P 500 having largely been on an upward path in recent months, it seems many have forgotten to evaluate the health of those blue-chip companies that dominate the index.
The likes of ExxonMobil and Chevron are already reeling from low oil prices, while the likes of Microsoft, Coca-Cola and Johnson & Johnson have all warned of the adverse impact of dollar strength.
“Within the US, of those companies that have announced disappointing earnings results, almost all have highlighted the strong dollar as the main factor holding back earnings,” says Michael Stanes, investment director at Heartwood Investment Management.
“Companies with big global operations have suffered as a result of the prolonged run we have seen in the dollar dating back to the middle of 2014, which has made US firms both less competitive in terms of pricing and also less profitable as a results of earnings translations.”
For Dan Harlow, portfolio manager on AXA Framlington American Growth Fund, the market has been driven by large-cap “bond proxies”.
However, he says interest is now broadening out to younger, growth-oriented businesses that have been overlooked in the past couple of years.
His preference is for a more-domestically focused mid-cap bias. For example he owns “younger and more dynamic” tech names such as Salesforce.com rather than the likes of Apple, Microsoft or IBM.
“We have seen another big move in the dollar/euro in the past few days and those blue-chip overseas earners have guided cautiously,” he says.
“We have a bias towards companies which are proving out their business models in the US and will be looking to export in due course, or are building sales capabilities or expanding in Asia Pacific or Europe over time. They do not have overseas earnings to the scale of the big caps which have a flag in most territories already.”
More broadly, Kevin Gardiner, global investment strategist at Rothschild Wealth Management, also worries about the long-term impact of expected weakness in corporate earnings.
“With the US and wider developed markets not having seen a material correction for more than three years, investors are understandably nervous,” he says.
“The next big slump in earnings may well be just around the corner; a big sell-off in credit and bond markets as the Fed starts to raise rates could crunch investors’ appetite for risk; and/or this stellar ascent may have pushed valuations to such levels that financial gravity alone brings stocks crashing back to earth.”
The US market and the key challenges ahead for the economy will feature in the April edition of Portfolio Adviser, out soon.
