■ Equities were mostly up until mid-July, before dropping on continued virus uncertainty, incremental signs of a US slowdown and US-China tensions. Positive vaccine developments and solid Q2 earnings beats, particularly in the IT sector, have counterbalanced these headwinds.
■ The pace of earnings downgrades moderated over the last month in all regions and the US market even benefited from a majority of upgrades. As a result, the expected earnings growth rates for this year remained steady in the US while they edged a little lower in most regions, except in Japan where they continued to fall meaningfully.
■ In both Europe and the US, earnings expectations for Q2 were too low given the sharply reduced estimates. Most companies published results that were much better than feared, with June generally having shown a strong sequential improvement. In addition, most of them have managed to adapt their cost base fairly quickly to the new environment. IT stocks have benefited globally from the lockdown period and delivered sustained results.
■ Guidance has been notably diverse so far which confirms that the recovery will be choppy with wide variations from one company to another. However, most companies have continued to highlight a sequential improvement in demand trends but stay cautious on short-term guidance given risks associated with any COVID-19 resurgence. They are generally confident for the medium term and recognise their ability to make cost savings.
■ These positive surprises for Q2 earnings add to confidence that earnings forecasts for this year are unlikely to fall much more from current levels (-22% y/y on MSCI All Country World Index).
■ However, this really relies on the development of the pandemic in the coming months, particularly in the US, and, even in a positive scenario, we continue to believe that earnings estimates for next year (+30% y/y on MSCI All countries) are still significantly too high despite more constructive views at the beginning of Q3.
■ Prospects for the US Presidential election add uncertainties to the EPS outlook as Biden’s programme points towards rising taxes on corporates.
■ Given current valuations, protections against potential equity drawdowns could be useful for the rest of this summer as significant political and economic uncertainties remain.
