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by  Jeremy Richardson Aug 12, 2022

The increasing importance of the ‘income distribution pyramid’, the impact of the relatively strong U.S. dollar, and the weakening economic momentum in China – three key factors shaping the middle of the corporate earnings season. Yet according to Jeremy Richardson, these factors are removing some uncertainty and offering some light at the end of the tunnel for investors.

Watch time: 3 minutes 36 seconds

View transcript

Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update. And what an interesting month it has been. We're in the middle of the earnings season at the moment. Companies are telling us how they've been getting on over the first half of the calendar year, with particular focus on the second quarter. And three things are becoming evident, the first of which is the increasing importance of what I call the ‘income distribution pyramid’.

Companies who are selling to those households and individuals towards the top end of that income distribution seem to be doing better than those who are selling towards the bottom. I think this is a practical expression of some of the challenges that consumers are finding themselves facing with the rising price of heat, leisure, transportation, and shelter. All of these things are putting pressure on disposable income and leaving less in the kitty for some of the more discretionary items, and that is actually a clear trend which is coming through in terms of the reporting that we've seen so far.

The second thing I would say that we're seeing is the impact of the relatively strong US dollar. Now, because the US Federal Reserve has been increasing interest rates faster than many other central banks, that has resulted in relative strength of the US dollar compared to other international currencies. And that is making an impact for some companies, particularly those that are international, who are bringing overseas profits back to the United States. And when you're doing that, using a relatively strong dollar, it means those international profits are worth a little bit less, and that is also acting as a bit of a headwind in terms of short-term profitability.

And then the final thing I would say is that we're just beginning now to get a few indications that some of the companies that are reporting are seeing a weaker momentum out of China. This is comparatively new news. I think a lot of us have been expecting that post COVID zero and reopening of some cities, particularly Shanghai, economic momentum might be seeing an improving trend. But the most recent data suggests that actually consumers are responding not just to the COVID lockdowns, but also to concerns around the health and strength of the Chinese property sector in particular, and this seems to be acting as some of the dampening effect.

Now for investors, the impact on in terms of share prices does appear to be somewhat mixed, although those sort of three things are characterised as somewhat more negative. The impact on share prices is much more mixed, and the reason why is because of expectations. Now global equity markets have weakened (it is the habit of global equity markets to always try and look forward) and so to an extent, some of these negatives have always already been anticipated in share prices. And so confirmation of the negative news, funnily enough, in some respects is actually being taken as a positive because it is delivering, it's removing uncertainty and actually the share prices in some instances have been responding quite well.

From an investor's point of view this is quite a healthy and positive dynamic, I would say, because it suggests that we are moving through this period of uncertainty. This is, funnily enough, this is progress of the sort, and I think actually it should be welcomed by investors who are sort of thinking about perhaps the medium and longer term and what life could look like after this current period of economic weakness. I hope that's been of interest, and I look forward to catching up with you again soon.

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Recorded on August 2022