Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management


Alpha Outlook Ahead Of The Earning Season

09 Jul 2018

Investment Partners

The Q2 earning season starts in a week with the reports of major banks. Earning seasons are important moments for stock-pickers. They need stocks’ fundamentals to evolve as they expected, and stock returns to move in consistence with fundamentals.

Our monitoring of the environment for companies in Q2 does not suggest a game-changing season. In the U.S., the manufacturing and retail pulses remained buoyant, while higher dollar would put pressure on exporting companies. In Europe, the cycle was less supportive, but economic surprises stabilized and the EUR depreciated. Analyst expectations will be challenging to beat in the U.S. but companies profit warning should result in fewer disappointments. Could be more impactful for the alpha environment: possibly weaker in the US (driven by macro), better in Europe (more differentiation).

We expect the alpha environment in the U.S to remain mixed. The dominant themes, which provided opportunities early this year, are now ageing or constrained. The tax reform is now well priced, banks deregulation prospects are offset by a flattening curve for instance. Stock dispersion, a measure of arbitrage potential, seems appealing, but it is concentrated in few sectors. Additionally, we fear that just like the previous two quarters, improving fundamentals might not be rewarded in prices. Uncertainties and doubt about the sustainability of earning growth would overwhelm micro moves. The most interesting pattern in the U.S. remains the strong corporate activity, best exploited in our view by deep-value funds.

In Europe, we expect Italian tensions to come and go, but systemic risk might have peaked. This should allow investors to focus more on micro trends. Lower EPS expectations would also help a number of companies beat the consensus and be rewarded. Moreover, we expect opportunities to emerge from a diversity of themes, including trends in politics, sensitivity to global trade and to commodity prices, tax and fiscal reforms. As a result, stock differentiation should remain strong, as emphasized by unusually low stock correlations. The alpha environment seems more appealing in Europe as we start the new earning season.


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