What's going on?
Computing giant IBM’s fierce financials saw its stock price rise 3% on Wednesday, and it isn’t the only stunner on the catwalk. But are positive surprises really so in fashion this earnings season?
What does this mean?
IBM’s revenue grew (just) last quarter compared to a year before, thanks to a new mainframe model and strong software sales from a trendy Red Hat. That was a relief for investors who’d dealt with falling revenue for the previous five quarters.
Overall, 72% of US companies reporting fourth-quarter earnings so far have flaunted better-than-expected profits. That’s in line with the five-year average: companies prefer to underpromise and overdeliver. Appearances can be deceptive, however. These earnings have only been 1.1% better than expected on average, compared to a 4.9% average beat over the last five years.
Why should I care?
For markets: Waning energy.
Pleasant surprises are always more likely when expectations are low – and investors’ are lowering still. Across the US stock market, analysts now expect last quarter’s earnings to come in 2.1% lower than in 2018, compared to 1.5% at the start of January. Pessimism is principally pumping from the energy sector, where profits are expected to drop more than 40% from a year before. A low oil price and increasing costs have already hurt support firms like Baker Hughes, with all eyes now on US production giants Chevron and ExxonMobil’s earnings next Friday.
The bigger picture: Who will buy?
The low oil price is partly due to a general economic slowdown that’s also taking a big bite out of consumer discretionary companies: firms that make goods people want, but don’t need. The sector’s overall fourth-quarter profits are expected to end up 14% lower than in 2018, but there may be hope in store: luxury retailer Burberry raised its profit outlook on Wednesday thanks to particularly strong performance in China last quarter. Nevertheless, the rise of a deadly virus in the country could yet dampen consumer demand…