Mark Lister, 13 October 2022

The international quarterly reporting season has just started, and how it develops could have a large bearing on the direction of world sharemarkets over the balance of the year.

The biggest driver of share prices over of the long-term is the earnings companies are generating, and at the moment analysts and commentators are struggling to get a firm handle on where these are headed.

On the one hand, stocks look good value. World shares have fallen 25 per cent this year, and the ratio between share prices and earnings (the P/E ratio) has fallen to 13.7.

That's almost a third below last year’s peak of 19.1, while it's 12.8 per cent down from the 20-year average of 15.8.

That’s the cheapest since 2013, although we’re not yet sure if analysts have been appropriately pessimistic when it comes to earnings estimates.

Some of the US financial heavyweights kicked things off, and next week we’ll hear from the likes of Johnson & Johnson, Netflix, Procter & Gamble and Tesla.

Things will really heat up over the balance of the month with a landslide of releases from many other household names, including Amazon, Apple and Microsoft.

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Many of us are shareholders in these companies through our KiwiSaver funds, whether we’re aware of it or not.

As the largest sharemarket in the world, what happens to US shares will also set the tone for smaller markets around the world, including the NZX.

Revenue and earnings momentum is expected to have slowed further in the September 2022 quarter, with aggregate earnings for the S&P 500 index forecast to have increased by just 2.4 per cent (compared with a year ago).

That would be the lowest since the September 2020 quarter, when the global economy was reeling from the initial effects of the COVID-19 pandemic.

Corporates are facing many of the same headwinds as households, including cost pressures and rising interest rates.

Many large US multinationals have also had to contend with a very strong US dollar. The greenback is at its highest levels since 2002, and during the September quarter it was (on average) 16.7 per cent higher than 12 months earlier.

About 40 per cent of total S&P 500 revenues come from outside the US. With non-US revenues of 58 per cent, the technology sector is most exposed to unfavourable currency movements.

As always, the outlook commentaries from management teams will be crucial in terms of how investors react to some of these results.

Earnings forecasts for this quarter have fallen slightly over the past three months, but there are still question marks about the optimism built into future estimates.

We've seen high profile companies like FedEx, Nike and Nvidia either reduce earnings guidance or provide subdued outlook statements in the last several weeks.

Looking ahead, analysts see growth in S&P 500 earnings of 7-8 per cent during the 2023 calendar year. Some strategists believe this is too high, and that a small decline is more likely.

If that’s the case, the P/E ratio many people are using to gauge value could be misleading, because the denominator is too high.

On a more positive note, negative sentiment in the American Association of Individual Investors (AAII) survey is the highest it’s been since March 2009. That just happened to mark the bottom of the post-GFC bear market.

I wouldn’t count on us being at a turning point quite like that just yet, but it’s certainly comforting to think the unbridled confidence of recent years has started to dry up.