By Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund
Not for the first time in 2023, the upcoming US reporting season is expected to induce yawns.
Investors should not, however, be lulled into a ‘nothing to see here’ mindset – there will be plenty going on beneath the surface, presenting opportunities for the eagle-eyed. Here is what they should be looking out for.
Earnings turning for the better
While the overall S&P 500 result is expected to be marginally negative at -0.4%, according to net consensus earnings data from Bloomberg, it is more important to consider where it has come from. Even if the consensus is right, it would represent a turning point after three successive negative quarters.
In our view, the market is now on course for an accelerating trend of better earnings heading into 2024, with double-digit growth expected next year. This should focus investors’ minds on potential opportunities in 2024 – and these should be plentiful.
Companies that are better placed to deliver
Some of the sectors which delivered weak earnings through 2022 now look much better placed to deliver strong growth. The communication services and consumer discretionary sectors are two good examples.
The weak advertising market and bloated staff costs that blighted their results last year mean they are reporting off a low base. With excessive costs now stripped out, the advertising market recovering and activity in AI accelerating, they are now much better placed to deliver strong results. Alphabet, Amazon and Meta are the ones to watch here.
Travel continues to make a comeback
The global travel industry continues to recover well after the pandemic. Operators in this sector are expected to continue strong earnings; Marriot, Hilton and Booking.com should report well.
Payment companies, which benefit from more cross-border transactions, are also well placed to deliver good results – Visa and Mastercard in particular should maintain their strong operational delivery.
We expect this earnings season to confirm that the travel comeback story is alive and well.
High rates = income boost
Business balance sheets are generally strong, with most of those with longer term debt having fixed it at low rates some time ago. With interest rates currently high, some will earn strong investment income. We expect a broad spread of businesses, including Accenture, Edwards Lifesciences, Microsoft, Visa and United Health, to benefit in particular.
This should be one of the biggest things to watch this earnings season.
The market excitement on AI may have settled down recently, but AI activity is progressing at pace. Accenture has, in a single quarter, reported a threefold increase in the number of AI projects it is working on behalf of its clients.
Although it remains very early days, the cloud businesses of Microsoft, Alphabet (Google) and Amazon may already be experiencing growth boosts from AI, while Adobe has been quick to fully adopt and utilise AI in its rapidly developing marketing products. We expect to see exponential growth from what is still a low base in AI.
Technology is poised for a comeback
The Fourth Industrial Revolution is expected to make a strong earnings contribution through various tech companies despite the current negative semiconductor cycle.
This is partially due to accelerating AI activity, but it is also partly a function of geopolitical tension. The structural reshoring of semiconductor manufacturing capacity, for instance, means a company like ASML can later experience a revival.
Technology underperformed operationally last year, mainly because of tighter corporate client budgets and excessive staff costs. With these two headwinds easing or removed, the sector is poised for a comeback. We expect the sector to start a new phase of strong outperformance against the S&P 500.
We cannot ignore that higher-for-longer interest rate fears continue to stalk the market. But astute investors should pay close attention to companies whose structural outlook is not impacted – and which are investing further in the Fourth Industrial Revolution.