US earnings season: strongest in a decade?

We're now in the throes of the US earnings season: when hundreds of publicly-traded companies release their financial statements for the second quarter of the year. Details of their earnings, expenses and net profits are reviewed by fund managers, analysts and investors and portfolios are adjusted on the findings.

The period doesn't seem to have been a bad period for most. Forecasts from FactSet even suggest this could turn out to be one of the strongest quarterly earnings seasons in 10 years, with US president Donald Trump's corporate tax cuts and rising oil prices lending a helping hand*. So is there a compelling argument for investors to track an index, kick back and let US companies keep climbing heady heights of success? Not in my view.

There are reasons to be positive on the US: Donald Trump's tax cuts should mean that companies are better off and, because he famously links his performance as US president to the stock market, he is unlikely to do anything to upset the apple-cart before the mid-term elections in November. But let's also not forget that the US equity index has outperformed the global equity index over one, three, five and 10 years and, in my view, valuations of some of the larger companies in the US are looking expensive.

Let's take the FAANG stocks - US tech firms Facebook, Amazon, Apple, Netflix and Google – for instance. These giants currently account for almost 13% of the US equity index – the S&P 500**.

The first of them to release results this year was parent company of Google, Alphabet. It achieved strong earnings results, despite trade war concerns and monetary policy tightening from the US central bank. But, just two days later, fellow FAANG stock Facebook reported that its number of daily users was lighter than expected and its shares fell by 20% during after-hours trading***. This perhaps goes to show why picking and choosing stocks rather than blindly buying the whole market might be a good idea.

There is always going to be divergence in every equity market. For investors who want to tap into company success stories that the US has to offer, but don't want to end up paying over the odds or buying into struggling stocks, it could pay to leave the hard work in the capable hands of a fund manager. A global equity fund manager has more freedom to hand-pick the US stocks they like, and will blend these with equities from numerous regions which reduces country-specific risk.

Below, we look at some Chelsea Selection global equity fund managers with the biggest allocations to the US.

T. Rowe Price Global Focused Growth Equity – 65.8%^

This fund is actually 12% overweight US equities compared to its benchmark. Manager David Eiswert focuses on an individual company's fundamentals, rather than on the broader economic backdrop, when positioning his portfolio. Recently, he has been spotting more opportunities in the US than other areas of the market.

In the firm's mid-year review, the chief investment officers at T. Rowe Price said: “The growth outlook appears most robust in the US, where confidence remains high and last year’s tax cut package continues to put income in the pockets of consumers and corporations. Deregulation efforts, including lifting some restrictions on the US banking industry, also should support the US market in the second half of the year.”

M&G Global Dividend – 60.92%^

Managed by Stuart Rhodes, this fund also consists of holdings which have been hand-picked on a stock-by-stock basis, rather than the manager taking broader country or industry bets. Stuart believes that holding companies which can grow their dividends is key for a number of reasons. Not only can investors re-invest their income and hopefully compound their earnings, he believes dividends reveal the true underlying health and strength of a company. They are difficult to fake, after all.

A prime example of a US success story in the manager's portfolio has been Microsoft, which he first bought in 2008 and is one of his largest holdings. An initial investment into Microsoft of $1,000 on 21 November 2008 (when Stuart first bought it), would now be worth $6,420****.

“The company’s strategic vision and innovation means it has remained at the forefront of the technology sector at a time when many of the old industry leaders are fading into obscurity,” he said.

Rathbone Global Opportunities – 57.91%^

Manager James Thomson uses his 'secret sauce' analysis to spot under-the-radar opportunities, or companies which have more scope for growth than most other investors believe. The 'ingredients' or qualities that make up his process include entrepreneurial management teams, easy-to-understand business models and sustainable growth.

He tends to spot a lot of opportunities within the technology sector, particularly within the US as it accounts for more than one-quarter of the country's stock market*****.

“Technology has become a vital tool for almost every business, and few chief executives would be bold enough to ignore it,” James said. “In order to future-proof our portfolio, we maintain a broad spread of global investments in the technology sector including internet, software, hardware, video gaming and semiconductors.”

Several of his largest individual holdings are US technology stock and include Amazon, Adobe Systems, PayPal, computer game company Activation Blizzard, Visa, Mastercard and gaming firm Electronic Arts.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Ryan's views are his own and do not constitute financial advice.

*Source: FactSet, as of 20 July 2018.
**Source: Slickcharts, as of 25 July 2018.
***Source: MarketWatch, as of 25 July 2018.
****Source: US Independence day commentary from M&G, as of 4 July 2018.
*****Source: Seeking Alpha, as of 10 May 2018.

^Source: fund fact sheets, July 2018