What Strategists Are Saying About This Earnings Season So Far

(Bloomberg) -- Two-thirds of the way into the earnings season, the U.S. has the most, Japan has the biggest, and technology is spurring them on.

Results that beat expectations, that is. This is what market strategists from JPMorgan Chase & Co. to Barclays Plc are highlighting to their clients so far:

Japan Surprises

The U.S. is leading the way with 77 percent of S&P 500 companies beating EPS estimates, compared to 68 percent for Japan's Topix and 57 percent for the Stoxx Europe 600, said JPMorgan. But Japanese companies are posting the biggest earnings surprises, beating estimates by 15 percent, versus 5 percent for the U.S. and 3 percent for Europe. Korean, Hong Kong and Chinese companies are also showing upgrades, Credit Suisse said. Second-quarter results so far show profit margins have increased, although at a slower pace than in the first quarter, according to JPMorgan.

Technology Leads

At the start of the year, investors were looking to the energy sector to provide upside surprises along with U.S. domestic stories, according to Jefferies Group LLC. However, revisions have come from sectors more exposed to the global economy. For Credit Suisse, technology and healthcare are the standouts in the U.S., accounting for 40 percent of consensus 2017 EPS growth. The energy sector has disappointed the most. In Europe, tech and telecoms have been the best performers with utilities, consumer goods and industrials lagging. Tech and financials lead earnings upgrades in Asia.

Currency Effect

Currencies are having a significant impact on second-quarter results, and will probably be a key driver of EPS revisions for the second half, according to the JPMorgan strategists. The relative sales beats of U.S. versus Europe are strongly correlated to the move in the euro-dollar, while the weaker yen provided a boost to Japanese earnings, they said.

Revising Down

The strength of the common currency has pushed European earnings revisions into negative territory, according to Credit Suisse. Still, revisions remain above their long-term average and would need to fall “significantly below their norm'' to become a drag on stocks, the analysts said.

Positive Outlook

Most companies reported improved demand, largely driven by cyclical growth, according to an analysis of 110 earnings calls by Deutsche Bank. Of those, 55 percent were positive on growth and 23 percent negative. Many companies noted a pickup in Europe and Asia, while Latin America and the Middle East remain under pressure. Pricing power is mixed, with wage pressures in focus, Deutsche Bank said.

Next Year

While 2017 earnings for the MSCI World Index were unchanged, 2018 estimates were revised down by 0.6 percent last week, according to Commerzbank AG. Europe, the Middle East and Africa saw the strongest downgrades with a downward revision for 2018 of 3.2 percent, they said. In contrast, emerging market Asia was upgraded the most. 

Strategists at Barclays are not concerned, at least for Europe. A forecast for 9 percent EPS growth in an environment of robust economic growth, stable commodity prices and potential rate hikes from the European Central Bank appears conservative, they wrote.

To contact the reporter on this story: Cormac Mullen in Dublin at cmullen9@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Robert Brand