Upbeat earnings dispel gloom

Upbeat US and European earnings are underpinning our positive outlook equities in general, which we continue to prefer over bonds, and our preference within equities for more- attractively valued European shares.

With a majority of companies in the S&P 500 having reported their third-quarter results, earnings so far have demonstrated continued profit growth and are broadly beating expectations.

Drinks behemoth, Coca Cola, did get hit by a double whammy of a rising dollar (making foreign revenues worth less when translated to the home currency) and a trend toward healthier living. But overall, profit margins at US companies remain high at 10 per cent for the index as a whole, and we see robust profitability continuing.

While earnings are beating expectations by a comfortable margin so far, revenues are about in line with forecasts, suggesting the impact of the strong dollar on foreign-sourced revenues was unanticipated. The foreign share of overall S&P 500 sales is down by 2.6 per cent so far this year - it's difficult to say with any certainty, but it seems likely that the nearly 8 per cent appreciation in the trade-weighted dollar was a factor.

About a third of European companies have reported third-quarter results, and so far results are encouraging - earnings have grown for a second consecutive quarter and are ahead of expectations. The only area of weakness is oil exploration and production, which is not surprising given the recent drop in oil prices. Further disappointments from this sector seem likely as the earnings season continues.

In contrast to the US, a near 4 per cent decline in the euro should help European companies as 60 per cent of their revenues come from abroad. Some of this is likely to be offset by the recent slowdown in global growth, particularly in emerging markets - key consumers of European products. But we expect the full earnings season to show growth for the second consecutive quarter after almost four years of no growth as the weaker euro offsets weaker global growth. We remain positive on European equities and believe the recent manufacturing slowdown will be shallow and temporary.

Rebecca Hughes is an executive director at Coutts

Coutts writes a regular blog for Private Client Adviser