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US corporate results hint at end of profit recession

Wednesday, 19 Oct 2016 05:39:12 | Rebecca Hyam

Netflix has surprised analysts with a jump in user numbers. (ABC News: Matt Eaton)

There were some solid profit reports released overnight, offering hope that this corporate earnings season could mark an end to the US profit recession, which began in the third quarter last year.

Markets at 7:30am (AEDT):

  • ASX SPI 200 futures +0.2pc to 5,404
  • AUD: 76.62 US cents, 62.33 British pence, 79.58 Japanese yen, 69.77 euro cents, $NZ1.064
  • US: S&P 500 +0.62pc to 2,139, Dow Jones +0.42pc to 18,161, Nasdaq +0.85pc to 5,243
  • Europe: Euro Stoxx +1.27pc to 328.65, FTSE +0.76pc to 7,000 DAX +1.22pc to 10,631
  • Commodities: Gold +0.51pc to $US1,261.39/ounce, Brent crude oil +0.49pc $US51.77/barrel, iron ore $US58.00/tonne

Netflix was the stand-out performer, with its shares soaring almost 20 per cent, after the video streaming firm reported much stronger than expected subscriber growth in its quarterly results.

United Health surged 7 per cent, as investors embraced the company's latest earnings and forecast.

That lent some support to the broader healthcare sector, but gains were limited somewhat by a decline in Johnson & Johnson's share price.

Goldman Sachs also rose, after the bank's results smashed market expectations.

Analysis from Thomson Reuters showed that, of the 52 S&P 500 companies which have reported results so far this quarter, 81 per cent had delivered earnings that topped average estimates.

Speaking to CNBC, BMO Global Asset Management's head of equities Ernesto Ramos said the profit reporting season could underpin stock market strength in the final months of the year.

"The key to the market rising more here will be better earnings growth," he said.

But other analysts were exercising caution.

In an economic note, FBN Securities' chief market strategist Jeremy Klein warned that momentum would need to be maintained and that could prove to be a challenge.

"Although the third quarter reporting season has kicked off solidly, the recovery will need to accelerate for corporate executives to surpass their aggressive profit forecasts for next year," he said.

In economic news, the US Consumer Price Index rose 0.3 per cent in September, which was in line with expectations.

It was the fastest pace of growth in five months, suggesting inflation may be moving closer to the Federal Reserve's target.

The annual rise was 1.5 per cent, which was the highest reading since October 2014.

But RBC Capital Markets' chief US economist Tom Porcelli said there was a lot more weakness in the inflation data than the headline figures indicated.

"Core prices rose a modest 0.1 per cent as the sharp increase in housing (up 0.4 per cent) was offset by much more modest gains across other components (medical care in particular swung from 1 per cent last month to just 0.2 per cent)," he wrote in an economic note.

"Interestingly, core services continue to run at a heady clip of 3.2 per cent year on year and this 60 per cent chunk of CPI continues to support broader inflation in an environment where the goods side of the ledger remains in perpetual deflation.

"So there remains a good dose of domestic-sensitive inflation in the system and, accordingly, one of the key pivot points in the inflation narrative will remain the state of global growth and the commensurate impact of the US dollar on goods prices."

Markets in Europe added value, with a pick up in inflation, a boost for budget airline easyJet and a rally among mining companies boosting London's main index.

Consumer prices in the UK rose by 0.2 per cent in September, pushing the annual rate to 1 per cent from 0.6 per cent.

That represented the highest annual increase since November 2014, and was also slightly better than the 0.9 per cent rise most economists had expected to see.

Core annual inflation also rose to the highest level in two years, at 1.5 per cent from 1.3 per cent.

Since Britain voted to leave the European Union in June, easyJet's share price has slumped by about 40 per cent and earlier this month it issued a profit warning.

But major rival Ryanair also slashed its profit forecasts earlier this week and easyJet benefited from that news.

Australian shares are set to open higher with the ASX SPI 200 up 0.2 per cent to 5,404.

At 7:30am (AEDT), the Australian dollar was worth 76.62 US cents, having strengthened overnight.

West Texas crude oil had edged up to $US50.25 a barrel, Tapis had eased slightly to $US51.80 and spot gold had increased to $US1,261.39 an ounce.

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