Another earnings season is underway

Article #823 by Edward Rizzo - Published Weekly

The third quarter reporting season is now well-underway with most companies across the US and Europe publishing their financial statements for the third quarter of the year and providing guidance for the upcoming period.

The publication of quarterly financial statements by the most influential companies across the world is always an important time for the stockmarket as participants assess the overall health of the individual companies.

This reporting season came about at a very delicate time for the stockmarket following the latest geopolitical events in the Middle East and the most recent signals by the major central banks that interest rates will be required to stay ‘higher-for-longer’ in order to stem inflation. These latest events add to the series of shocks that investors experienced over the past couple of years. After the outbreak of the coronavirus pandemic in early 2020 which crippled global economies, Russia’s full-scale invasion of Ukraine two years later sent energy and food prices soaring, propelling worldwide inflation to their highest levels in decades. Global central banks responded with a series of unprecedented interest rate hikes in quick succession over the past 18 months.

The renewed upturn in bond yields over recent weeks as central banks are unlikely to proceed with interest rate cuts during the first half of 2024 once again led to important implications for all asset classes. In fact, while the US equity market performed remarkably well during the first seven months of 2023, there was a marked downturn over the past three months.

The S&P 500 in the US entered into ‘correction territory’ last week after having dropped by more than 10% from its high at the end of July – the largest drawdown so far in 2023. This happened when share prices of some of the larger capitalised companies in the US dropped heavily in the aftermath of their latest quarterly announcements. One remarkable movement was that seen in the share price of Alphabet (the parent company of Google) which dropped by more than 9% last Wednesday (its worst one-day decline in nearly a year and the worst daily performance since a 12% slump on 16 March 2020 at the start of the pandemic). Although the company reported a very strong improvement in its overall level of profitability, revenue from cloud services narrowly missed analyst expectations.

The performance of the S&P 500 index has become increasingly influenced by the mega-cap companies. The so-called “magnificent seven” (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA and Tesla which account for almost 30% of the overall index) have seen their share prices jump by more than 75% over the past 12 months leading the market rally during the first seven months of the year as a result of their strong financial performances and enthusiasm around artificial intelligence. This helped the S&P 500 index rally by over 20% over the past 12 months.

However, in view of the dominance of these seven companies in the overall index, many market commentators calculate the performance of the S&P 500 with each company having an equal weighting. By using this benchmark, the index is up by a more modest 11% during the same period.

Incidentally, following the sharp stockmarket sell-off for a large part of 2022, the S&P 500 index had bottomed just over a year ago on 12 October 2022. Since then, most of the large-cap stocks rallied as inflation eased from the double-digit figures and as economic growth proved resilient despite the significant upturn in interest rates.

While the international financial markets are currently dominated by regular announcements during the reporting season, this is not a requirement in Malta as companies listed on the Malta Stock Exchange are only obliged to publish their financial statements semi-annually. Nonetheless, a few companies still update the market on a quarterly basis in order to keep the investing public adequately informed of ongoing developments. Last week, APS Bank plc published their quarterly figures followed by HSBC Bank Malta plc at the start of this week in tandem with the announcement of their parent company. Bank of Valletta plc is due to report on their Q3 financial performance today while Malta International Airport plc generally provides its third quarter financials by mid-November.

Meanwhile, the recent market developments in Malta were mainly centred around the heightened activity in the corporate bond market with new offerings by AX Group plc, International Hotel Investments plc and APS Bank plc apart from the rights issue of Lombard Bank Malta plc. The strong demand by existing holders of the maturing bonds of AX and IHI together with the evident enthusiasm seen for the subordinated bonds of APS reconfirms the appetite by local investors for fixed-income securities following the unprecedented upturn in interest rates in such a short period of time. The sheer extent of excess liquidity within the Maltese banking system is likely to continue to support new issuance activity as many investors seek to mobilise increasing amounts of idle funds into income-generating assets.

Despite geopolitical uncertainty taking centre stage over recent weeks with the terrible events unfolding across the Middle East, the main focus across financial markets that is likely to dominate future movements across most asset classes remains the interest rate environment. The bear market in bonds is likely reaching its final stage as interest rates approach a cyclical peak. However, bond prices are only likely to begin to recover when there is ample evidence of concrete interest rates cuts materialising in the US and also in Europe. Inflation readings and statements by central bank officials will therefore remain the most important drivers in the weeks and months ahead.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.