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A cursory look at the current second quarter US company earnings season will tell you that once again, the vast majority of reporting companies have exceeded their earnings-per-share estimates. In fact, 241 of the 326 companies that had reported earnings as of the 31st of July have exceeded their estimates, a “beat rate” or 73.93 percent.

Whilst that number sounds impressive, it is worth noting that the “beat rate” has not dropped below 60 percent for the past 29 earnings seasons, which is as far back as my data goes. Part of the reason for this, is that the earnings estimates are consistently lowered in the approach to any given earnings season, seemingly to ensure a strong beat rate. Note the lowering of estimates for the current earnings season over the past 12-months:

It is unsurprising therefore that those who do miss their earnings estimates are heavily punished by the market; the average stock that misses its earnings expectation falls by 3 percent on the day, whilst the average earnings beat causes a rise of just 1.43 percent.

It is interesting to note (but unsurprising to those watching the markets), that despite the declining earnings expectations, US markets have continued to rise, which meant that the price of the index, relative to forward earnings has also continued to rise (a lift in the P/E ratio), meaning that by this measure, stocks are more expensive relative to earnings.

Markets have certainly benefitted from lower and declining interest rates around the world, and the lower interest rates mean that many investors will be happy to receive a lower return on their shares. This means that price-to-earnings levels can go higher at declining interest rates, as we have seen with shares recently.

S&P500 earnings have been trending higher for some time, and this earnings period the S&P500 will make just a little more than this time last year. However, the current earnings period will end with less earnings than Q3 2018, and it is somewhat likely that Q3 2019 earnings will be lower than the equivalent period in 2018 as well.

Of the firms that have provided Q3 guidance for their earnings, more than half forecast earnings that were below analysts’ expectations, which according to Bloomberg data, is the worst in four years. Many of these companies blamed trade tensions as a reason for weaker earnings.

According to Frances Donald, head of macroeconomic strategy at Manulife Asset Management ““The U.S. economy will not be able to rely on strong households to offset the weakness in global trade activity … “Increased trade tensions substantially change the U.S. and global economic narrative for the second half of the year.”

Whilst this earnings season may appear strong from a “beat rate” perspective, that perhaps masks how relatively expensive stocks have become, and doesn’t fully illustrate the risks ahead. US markets are now pricing in a near-certainty of another Fed cut in September, but even that may struggle to keep this bull market going.