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Earnings muted, but not wiped out

Investment earnings

Investment earnings out of the US are likely to be muted as specific sectors work through rolling downturns impacting them at different times.

Investment earnings, particularly those from the United States, are likely to be muted in the second half of the year as stock markets avoid a widespread recession, but face rolling, unsynchronised downturns in different sectors, according to JP Morgan Asset Management.

Christian Mariani, an investment specialist covering US shares for the global investment firm, said the state of earnings in the first half of the 2024 financial year would be dependent on whether a recession had happened or might still take place.

“When we think about the concept of recession, we might think about 2008 or 2020 as a prime example where there has been a synchronised earnings recession with most of the sectors going down at the same time,” Mariani said during a recent media briefing.

“The reality is, looking over the last four or five quarters within the S&P 500, we are seeing a rolling or unsynchronised earnings recession with different sectors going through that at a different time.”

He noted the communications sector had already entered into a decline in the middle of last year, while earnings in the technology sector fell towards the end of the year, but the energy and industrial sectors had yet to face any earnings downturn.

The rolling earnings decline and relative size of some of these sectors meant there was unlikely to be a widespread collapse in earnings in the future, he said.

“Given how large the technology and communication sectors are as a share of the S&P 500, about 80 per cent of the index by market capitalisation already went through negative year-over-year earnings on a cumulative basis from the first quarter of last year,” he said.

“Due to this, even if we do get a slowdown or recession, we would not expect earnings to materially collapse because part of the market already went through some of that.

“Companies are also starting to right-size in terms of reducing costs to make their businesses ready for an environment, from a macroeconomic standpoint, that is not going to be as great as it has been before.”

He said the earnings forecast was being reflected in company reports currently being released in the US.

“We are currently in earnings reporting season and about 20 per cent of the market has reported, and so far earnings have been mixed,” he said.

“In the short term, we are going to see quarter two earnings, year-on-year, for the S&P 500 at about negative 9 per cent, but a little bit farther out in the medium term, we expect normal earnings growth to be around 10 per cent.”

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