Earnings surprises support equity returns

Key points

• The MSCI All Country World (global shares) Index rose 5.0% in USD in October, lifting the 3-month return to +2.9%. Returns in NZD were more modest, up 1.3% for the month and 0.7% over the past three months.
• October brought a strong earnings season in the US. At the time of writing, 440 companies in the S&P 500 had reported results with 360 companies (82%) beating earnings estimates, compared to a long-run quarterly average of 66% since 1994.
• An emerging trend is that companies with pricing power that have been able to weather supply side constraints have been able to significantly grow profits, beating expectations. We think this trend will selectively continue.
• Bond yields continued to rise through October; the New Zealand 10-year bond yield increased sharply by 0.54% to 2.63%, while the US 10-year bond yield climbed a more modest 0.06% to 1.55%. This contributed to declines for major New Zealand and global bond indices.

Key developments

Global equity markets continued to push ahead with the reporting season in the US on balance beating market expectations; however, many management comments highlighted inflation – in particular labour, energy and input costs. This wasn’t lost on the bond market with interest rate curves flattening, seeing sharp sell offs in local markets. The New Zealand 2-year swap rate moved up 0.80% in the month to close at 2.23% with similar moves seen in Australia and globally.