Strength of US earnings beats weakening as "headwinds mount" - UBS

(Alliance News) - While the latest US corporate earnings season has not been as weak as feared, analysts at UBS said New York-listed firms have hardly knocked it out of the park either.

The UBS commentary comes ahead of a major few days for US earnings. Google owner Alphabet Inc, Coca-Cola Co, Microsoft Corp Visa Inc report on Tuesday, Boeing Co and Facebook owner Meta Platforms Inc on Wednesday and Amazon.com Inc on Thursday. US oil majors Exxon Mobil Corp and Chevron Corp then take centre-stage on Friday.

"This is a big week for US earnings, with roughly 165 companies representing 45% of the S&P 500 market capitalization reporting, including many of the tech heavyweights. At the time of writing, the earnings season is off to a mixed start," UBS said.

The Swiss bank noted firms with a European exposure are showing signs of struggle. US banks, on the other hand, largely impressed. They benefited from "resilient consumer spending - thanks to a

still-healthy job market - and benefits from higher interest rates", according to UBS.

Among the more impressive US banking earnings report, JPMorgan Chase & Co earlier this month reported a "solid" third quarter, as revenue enjoyed a nice boost from increased interest rates.

Net revenue improved 10% to USD32.72 billion from USD29.65 billion. Despite impressing the market, profit still fell. In the three months to September 30, net income fell by 17% to USD9.74 billion from USD11.69 billion the year prior.

JPMorgan set aside a USD1.54 billion provision for credit losses in the third quarter, reversed sharply from a USD1.53 billion gain a year before, as it gears up for the US to head into a recession - so it expects a rise in bad loans.

Ahead of a big week for tech earnings, Snapchat owner Snap Inc spooked markets last week.

Revenue in the third quarter of 2022 was 5.7% higher year-on-year at USD1.13 billion, but its net loss widened to USD359.5 million from USD180.8 million.

Snap's worrying report could be a sign of things to come for US tech firms.

"As the Federal Reserve continues to tighten, with a further 75-basis-point rate rise expected from next week's policy meeting, the tech sector looks especially vulnerable, given its heavier reliance on more distant profits and still demanding valuations compared to value sectors," UBS commented.

All-in-all, UBS noted earnings have been solid, but "headwinds" are mounting.

"Overall, the majority of companies are beating earnings. But the results so far underline our view that earnings momentum is slowing, and we expect headwinds to mount further," UBS explained.

"Earnings beats are already below the average of recent years, even after a recent scaling back of expectations by analysts. While 65% of companies are surpassing earnings per share estimates, this is below the average of 75% over the past five years. This is especially striking because third-quarter estimates had been cut by nearly 7% over the last three months, suggesting that the bar was low. In aggregate, earnings are beating by 1.4%."

The focus of the day will be firmly on Alphabet and Microsoft.

Alphabet is expected to report third-quarter revenue of USD71.0 billion, according to CNN cited consensus, which would be up some 9.0% from USD65.12 billion.

Microsoft, which reports earnings for the first quarter ended September, is expected to post revenue of USD49.7 billion, up 9.7% year-on-year from USD45.32 billion.

Swissquote analyst Ipek Ozkardeskaya commented: "Alphabet's revenue is expected to rise, but slower than recent quarters, while earnings per share are expected to be negatively impacted by the challenging advertisement business, and the rising competition from TikTok. If there is one thing that could save the day is the cloud revenue, which has been one of the key growth drivers. But even that is expected to reveal a slower growth compared to previous quarters.

"For Microsoft, the picture is not rosy either. Microsoft is expected to reveal the 5th consecutive quarter of slowing revenue, due to a steep decline in PC demand, the strong US dollar, and unideal macroeconomic conditions. As for Google, investors will focus on how Microsoft's cloud segment did last quarter. Growth in Azure is also expected to slow, but remain at around 20%."

Ozkardeskaya added: "It's important to remember that soft results don't necessarily mean negative market reaction. If the soft results still beat the market estimates, we could see Google, and Microsoft shares rally."

By Eric Cunha; [email protected]

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