Earnings Season to Echo World Cup With U.S. Whupped by Europe

Jul 08, 2014 12:27 pm ET

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July 8 (Bloomberg) -- If the loss to Belgium that knocked the U.S. out of the World Cup still stings your American patriotism, don’t bank on the upcoming corporate earnings season as the place to find revenge.

To put it bluntly, the profit-forecast comparison looks like a matchup between the German national team and the Metuchen High School squad. (No offense to the Bulldogs, but 9-9-4 just is not going to cut in the Central Jersey Group 1.)

The biggest divergence may be at banks, where strong profit growth helps explain projections for an almost 18 percent jump in earnings-per-share at Stoxx Europe 600 Index companies, according to Jeff Kleintop, chief market strategist at LPL Financial LLC. Across the pond, companies in the Standard & Poor’s 500 Index are forecast to post a 5 percent increase as bank earnings tumble 7.8 percent, analyst estimates compiled by Bloomberg show.

“The return of economic growth, improving finances, and aggressive actions by the European Central Bank to keep funding costs low and boost bond prices have helped support the earnings rebound among Europe’s banks,” Kleintop wrote in a note yesterday.

Trailing Returns

Banks are only part of the story. U.S. tourism, clothing and consulting companies are reporting improving conditions in Europe, according to Kleintop. The euro region’s economy is projected to grow 1.1 percent this year after a two-year contraction.

Indeed, if you’re the type who believes in “American Exceptionalism” then the stock market may not be the place for you over the next year or so. Consider the forecasts for stock- market gains through the middle of 2015 from Citigroup Inc. strategists: Europe’s market is projected to gain 13 percent and Japan and emerging markets are forecast to rise 16-17 percent. And what of the land of the free and home of the brave? A measely 5 percent, half the predicted increase for the global market as represented by the MSCI All-Country World Index.

Many have expressed concern that a disappointing earnings season could cause a selloff in U.S. stocks, where a drop of 10 percent has not been seen in more than two years.

Vulnerable Stocks

The S&P 500 is trading at a valuation of 18 times reported earnings. That is the highest since the summer of 2011 when the S&P 500 was in the middle of the biggest retreat of the current bull market, losing more than 19 percent between April and October in a swoon worsened by a downgrade of the U.S. credit rating by S&P. The market’s “internal energy readings” are starting to “rhyme” with the summer of 2011, according to Jeffrey Saut, chief investment strategist at Raymond James & Associates.

“I do think we are vulnerable to a 10 percent to 12 percent decline in the weeks ahead, albeit within the construct of a secular bull market that has years left to run,” he wrote in a post on the firm’s website.

That’s a bold call to make considering the floodgates of the earnings season have yet to be opened. We’ll get the first trickle today when Alcoa Inc. reports results after markets close, around the same time Germany takes on Brazil in the World Cup semifinals. Have your vuvuzelas ready.