The S&P 500 Index reached a new all-time high this week, surpassing its previous summer peak of 3,025.9.

The recent rally in the US equity index was fuelled by upbeat earnings results, a Fed rate cut and progress on US China trade talks. 

Investment sentiment rose as reports published by the Office of US Trade Representative indicated that parts of phase one of the trade deal were being finalised.

Moreover, further weakness in economic data increased investors’ optimism of a further rate cut by the Federal Reserve.

The probability of a rate cut rose above the 90 per cent level ahead of the FOMC meeting held on Wednesday, where the Fed announced another 25 basis point rate cut to the benchmark funds rate. 

Meanwhile, third quarter earnings season is currently underway, with more than half of S&P 500 companies already reported actual results.

Despite the concern over the market impact of slower global economic growth and the escalation of trade tensions between US and China, the majority of the S&P 500 companies have beaten both revenue and earnings expectations.

Top and bottom line positive surprises

The percentage of companies beating revenue estimates amounts to 60% of the S&P500 companies that have reported so far.

This is slightly above the 1 year and 5 year average of 59%. Healthcare, Financials and Technology sectors are leading the list of sectors with the highest number of companies that posted the largest positive difference between actual and estimated sales.

Looking at bottom line earnings, 78 per cent of US companies have managed to report a positive earnings surprise, with the percentage of companies above the 5 year historical average of 72 per cent.

In total, reported earnings are 4.64 per cent higher than expectations, albeit still below the 1 year and 5 year average of 5.2 per cent and 4.9 per cent, respectively.

All sectors within the S&P 500 have reported higher than expected earnings, with the most notable surprises recorded in the consumer goods, materials and health care sectors. 

Notwithstanding the upbeat earnings and the buoyant market sentiment, S&P500 companies with a higher global revenue exposure, have felt the pinch of the trade war tensions as they under-performed in terms of quarterly earnings and revenue growth.

Factset reports that companies with more than 50% of sales outside the US have under-performed the companies that are more dependent on the domestic economy. 

Mixed earnings growth

In sync with weakness recorded in macroeconomic indicators, net earnings growth so far is flat to negative at -0.31 per cent, weighed down by earnings declines in the basic materials, oil and gas and technology sectors.

Meanwhile, other sectors, including utilities, health care and consumer services have reported earnings growth in excess of 5 per cent.

Looking ahead, the earnings season also gives companies the opportunity to reiterate or adjust the forecasted earnings provided by the company, also known as forward guidance. Out of the 38 companies that have issued earnings guidance for the fourth quarter of the year, 68 per cent have issued a negative guidance. This implies that the majority of forward earnings estimates so far were revised lower. 

Disclaimer:
This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.