Key takeaways
- Earnings reports have started to reflect a deceleration in economic conditions across the board.
- This has been mostly attributed to a contraction in margins, rather than a decline in revenues.
Company earnings in the MSCI ACWI have declined by 6.6% year-on-year (YoY) so far in the reporting season for Q1 2023. However, this decline has not been attributed to a fall in revenues, which have grown by over 8% in comparison to last year, but rather to a reduction in margins across regions.
Revenue growth remains positive in all regions, although there are some clear signals of deceleration in sales growth in US and China. In Europe, revenue growth deteriorated in the second half of 2022, but is now showing a strong improvement, with growth of over 9% YoY. This has been due to the positive spill-over effect from the reopening of the Chinese economy.
Therefore, the decline in reported earnings is largely explained by a deterioration in margins. Since Q2 2022, margins growth has been declining as companies across the world faced increased cost pressures. Russia’s invasion of Ukraine triggered a surge in energy and food prices, adding to inflationary pressures which were already affected by the aftermath of the Covid pandemic, increasing wage costs for firms and ultimately driving central banks to raise interest rates. As a result, margins declined in the second half of 2022 and are down by 0.7% YoY for the MSCI ACWI in Q1 2023. The context differs across regions and sectors.
Projections for earnings in 2023 fiscal year show double-digit earnings growth in China, with strong expectations also for the coming years. US earnings are expected to decline, but remain positive, reflecting a less negative outlook for the corporate sector. Earnings in Europe and Japan are also expected to be positive for this year.
EFGAM forecasts for quarterly earnings growth
According to our models’ forecasts, earnings growth is expected to differ across countries and regions. In the US and UK, earnings growth is expected to decline at least until Q1 2024. In the US, earnings growth is expected to turn negative in the second half of the year, under pressure from the contraction in margins. The MSCI UK index, generates almost 80% of its revenue from outside the UK, and is therefore more exposed to the global economic cycle. Although UK earnings growth is expected to decelerate from the high levels seen in 2022, it is expected to remain positive in the coming quarters. So far in the earnings season, the better-than-expected performance has been driven by positive surprises in Financials and Healthcare.
Conversely, in Europe ex-UK and Japan, earnings growth is expected to decline in the first two quarters of 2023 before picking up again in the second half of the year. Expectations for a short-lived pain in Europe ex-UK reflects both strong revenues and improving margins in recent months, possibly associated with the deceleration of cost pressures and a positive impact from China’s reopening economy. In Japan, weaker earnings guidance from companies has set expectations low for 2023. The Japanese yen has weakened against the US dollar by over 3% YTD, contributing to the positive stock market performance.
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