Fairtree Market Insights with Karena Naidu | Episode 7: Part 1

Karena
Hello everyone, and welcome back to Market Insights, a series where we delve into interesting topics affecting equity markets. Today I have Cornelius and Jock with me. Thank you guys for being here today. So, let’s kick it off. So, we saw a strong US earnings season with almost 80% of companies beating their estimates. Could we maybe unpack that and spend some time looking into these results.

Cornelius
Is the number north of 80% is the strongest we’ve seen since 2021? The aggregate earnings growth came in just above 12%. And information technology as a sector led the way, with more than 90% of companies beating earnings estimates. All the big tech companies delivered very robust results with Microsoft, Apple, alphabet, Amazon, everyone reporting very strong results and giving positive outlook statements.

Some of the shares were rewarded with share price moves up 8%. Amazon got clapped a bit because cloud growth came in weaker than the market wanted, but still very strong results. If you think about the extent of the earnings beat just over 8% earnings surprise, which means the earnings came 8% ahead of consensus. That is in line with the five-year average.

It’s custom for US companies estimates to come in high at the start of the year, then get downgraded then the companies come in and beat, quite comfortably. So, 8% isn’t something new. Interestingly, we saw consumer discretionary as a sector beating by 14% in aggregate, which shows that the US consumer is in a much better space than people expected.

And we can also see if we look at the amount of references to recession that completely dropped off the normal levels, where everyone was quite nervous in, Q1 reporting season, just, of the Liberation Day. Almost a quarter of companies spoke about the recession this time around, six sectors there were no companies actually mentioning recession.

If we think about the guidance that the companies provided, more than 60% of the companies issued positive guidance which means the earnings that they’re guiding the market, is ahead of what consensus is pencilling at the moment and there you have a mixed bag, industrial companies are actually issuing strong guidance as well as healthcare. And then by far the most positive mix is information technology.

Karena
Brilliant, thank you for that colour. That was really informative. So we’ve seen really strong earnings growth and guidance coming out of the infotech sector, but that’s not something new is it Jacques?

Jacques
No. So taking a bit of a step back following the earnings recession that the Mag7 companies went through in 2022 with the pullback in spending, we’ve seen very strong growth delivered by the mag7 over that period and using 2024 as a base we can see that they’ve delivered more than 30% upgrade to earnings of both 2025 and 2026 calendar years, which is opposite to what we’ve seen from the S&P 493, where they’ve had between 5 to 10% downgrades in their earnings. So, looking at the total shareholder returns for the year, very similar to last year where it’s been driven predominantly by the Magnificent Seven, which roughly falls within information technology and communication, and again driven by the superior earnings growth posted by those businesses. Four of the sectors actually posted negative earnings growth while benefiting from a rerating that’s driven the total shareholder return.

Karena
Brilliant, thank you Jacques. Please feel free to join us for our next session, where we’ll unpack the information technology sector in a bit more detail. Thanks so much.