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August 16, 2018

STOXX 600 18Q2 Earnings Review – A Tale of Two Sectors

by Tajinder Dhillon.

With roughly 85% of companies in the STOXX 600 reporting earnings, lets review how 18Q2 earnings season has played out.

In my 18Q2 preview, I noted the dominance of the Energy sector largely contributing towards 18Q2 growth expectations.  Putting our diversification hat on, it can be worrisome when one sector is driving the overall index growth expectations.  Exhibit 1 highlights the results of earnings season and showcases how sectors have Beat, Matched, or Missed EPS expectations.

Exhibit 1: STOXX 600 18Q2 EPS Scorecard

Energy Missing the Mark, but Financials give Boost

The Energy sector on the whole has been underperforming this quarter, with 47% of companies missing EPS expectations.   Some notable misses include Royal Dutch Shell (RDSa.AS), Total SA (TOTF.PA), and Repsol SA (REP.MC), which have put a drag on the Energy sector EPS growth rate as seen in Exhibit 2, which has dropped from 73.1% to 60.0%.  It is worth nothing that whilst these companies have missed EPS expectations, they have experienced very strong YoY earnings growth (i.e. 18Q2 relative to 17Q2).  In other words, these companies did not grow as well as the market was expecting which necessarily isn’t a bad thing.

A saving grace for the STOXX 600 this quarter has been the Financials Sector.  Strong beats from Barclays PLC (BARC.L) and Credit Suisse Group AG (CSGN.S) has lifted the sector to double EPS growth this quarter, from 7.4% to 14.0% as seen in Exhibit 2.

Exhibit 2: EPS Growth Rates for Energy and Financials

It is quite remarkable to see the gyration between these two sectors which almost reflect a mirror image of each other.  Of course we should not discount the fact that the Energy sector is still growing at a rapid pace of 60% in 18Q2.

In Exhibit 3, we can see how the Financials sector lifted the overall STOXX 600 EPS Growth rate to the current level of 9.6%.  We can see the direct increase in the index growth rate starting from July 24th which aligns exactly to when the growth in Financials started to occur this quarter.

Exhibit 3: STOXX 600 18Q2 EPS Growth Rate

How does growth look like when excluding Energy and Financials?

I will leave off on an interesting note for those interested.  What would happen to the 18Q2 STOXX 600 EPS growth rate if we were to exclude both Energy and Financials? The answer is a striking 0.6%…

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