Earnings season is almost entirely over in the U.S. and despite being “better than expected” the results are far from good. The one major theme that became most apparent over the last 8 weeks was the discrepancy between top and bottom line growth (see here for our full earnings analysis). With just 14 S&P 500 firms left to report we’ve seen just 31% of all firms experience year over year bottom line growth. On the top line, just 23% of all firms experienced year over year growth. The ability of firms to cut costs and beat expectations has been truly remarkable. A recent report out of the Euler Hermes highlights a similar trend in earnings in the U.K. The slight improvement is due primarily to destocking, lower investment spending and cost cuts. Profitability has continued to deteriorate though not at the pace we saw in previous quarters.
Euler Hermes reports:
The latest Euler Hermes survey of UK companies’ financial health indicated continued weakness of corporate performance in Q2, although the situation was a relative improvement when assessed against Q1. Free cash flow grew slightly from twelve months ago (up 0.6%), but was largely supported through destocking, reductions in investment spending and lower costs. Sales were reported to have remained subdued and, with evidence of heavy price discounting, profits remained under severe pressure.
Fabrice Desnos, Chief Executive Officer, at Euler Hermes UK said:
“The rise in cash flow reported by the companies surveyed during Q2 is not as positive as it might appear initially. This is because the improvement was largely due to lower investment, destocking and price cuts, with demand generally failing to improve. Heavy discounting was also a key factor behind another sharp fall in profits, highlighting the fragility of the UK economy. For this cash flow improvement to signal a rebound, we would need to see more support of demand and less explained by investment reductions and price cuts. However, conditions do appear to be improving, with latest data not as bad as seen around the turn of the year which can only be seen as good news.”
The overall low quality of earnings isn’t just an American phenomena. The problems are truly global….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.