Companies often forecast their current year’s profit (earnings) numbers as a way to set investor expectations. This is known as issuing earnings guidance, and it offers an inside perspective on a company’s future performance.
Beating earnings guidance is generally seen as a positive thing by investors. From the graph below, you can see that most companies in both the US and UK outperformed their earnings guidance in the 12 months to the end of May 2024.
Chart showing sectors beating earnings guidance – US versus UK
That’s helped US stock markets rally to new all-time highs, while UK markets remain positive and just below record levels.
Here are a few sectors that caught our eye.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Energy
63% of US energy companies beat earnings guidance.
29% of UK energy companies beat earnings guidance.
US energy companies beat earnings guidance by 1.6% on average.
UK energy companies beat earnings guidance by 1.4% on average.
Despite the weaker UK performance versus guidance, traditional energy companies have typically remained very cash-generative as global oil demand remains high.
That’s helped fund dividend payments and a wealth of share buybacks across the sector. Remember though, shareholder returns are never guaranteed.
Traditional US energy companies (think oil and gas) remain more expensive than their UK peers. However, valuations in both regions are largely below their long-run levels, despite most of them beating profit guidance.
The low valuations in both markets are likely due to question marks about the long-term outlook.
Many governments and climate-focused investors are continuing to call for phasing out fossil fuels and transitioning to cleaner energy sources like solar and wind.
We think this is likely to be a long transition, and the low valuations, especially in the UK, have created some attractive opportunities for investors in the meantime.
Financials
72% of US financial companies beat earnings guidance.
54% of UK financial companies beat earnings guidance.
US financial companies beat earnings guidance by 0.9% on average.
UK financial companies beat earnings guidance by 1.7% on average.
In both regions, real wages (wage growth after accounting for inflation) have continued to rise, which is helping consumers stay strong.
We expect this to continue, which would be good news for the banking sector.
Loan defaults have been coming in lower than previously expected, meaning that more of the banks' reserves (money held aside to cover loan defaults) can be unwound, which would help boost profitability.
If this trend continues, we see scope for profits to keep beating company guidance overall.
UK-focused banks’ valuations here are generally lower compared to US peers, and capital ratios (a measure of financial strength) are in good shape. The sector’s largely beaten profit guidance so far in 2024, and there’s been an uplift in valuations as a result.
Despite this, we see scope for further upside surprises and UK-focused names remain our preferred choice. Although, nothing is guaranteed.
Real Estate
50% of US real estate companies beat earnings guidance.
54% of UK real estate companies beat earnings guidance.
US real estate companies fell short of earnings guidance by 0.7% on average.
UK real estate companies beat earnings guidance by 1.0% on average.
High levels of inflation have been a major headwind in recent years, causing central banks to raise interest rates in a bid to bring it back under control.
These higher rates generally aren’t good for real estate, as they lower the valuations of all types of property. Higher rates also push up mortgage costs for homebuyers, reducing affordability and leading to lower sales and painful reading for investors.
But the current rate-cutting cycle could push this dynamic into reverse and help the housing market spring back into action.
There’s a significant undersupply of homes in both the US and UK markets, and housebuilders hold the key to solving the supply and demand imbalance.
It’s likely to be a year or so before we see sector profits pick back up significantly, but current valuations look compelling.
Tech
83% of US technology companies beat earnings guidance.
80% of UK technology companies beat earnings guidance.
US technology companies beat earnings guidance by 1.8% on average.
UK technology companies beat earnings guidance by 1.5% on average.
Artificial intelligence (AI) is bringing a whole host of excitement and benefits to tech companies, helping many of them to exceed their earnings guidance on both sides of the pond.
Tech companies look set to continue spending big on AI, and the supply of computing power is struggling to keep up with their demand as a result. That’s because many of the big players view the risk of not investing now and being left behind in the AI race as far more dangerous than the risk of over investing.
It will cost billions to build out the necessary infrastructure, so expect to see a lot of cash devoted to that in the coming year. These costs don’t pass straight through the income statement in one go though. Instead, they’re typically added to the balance sheet and drip-fed through over time.
It’s hoped that the efficiency and productivity gain that new AI-based features bring will more than cover their costs. But there are no guarantees, and there’s constant pressure to keep delivering the next big leap forward.
We think US names stand a better chance of continuing to beat earnings guidance, given their larger size and deeper pockets to fund the next steps in the AI arms race.
The key takeaways for investors
US names have clearly beaten guidance more often than their UK peers on average.
In part, that’s likely due to a stronger-than-expected US consumer. It could also be thanks to companies setting overly conservative guidance figures in the first place so that they look better if earnings land ahead of initial figures.
Given the positive impact that comes with surpassing guidance, we suspect it’s likely a combination of the two.
What could be next?
The US market looks expensive relative to the UK, with price-to-earnings (PE) ratios of 27.2 and 14.7, respectively.
That means US names will have to continue growing faster than their UK peers to justify the valuation.
With the UK economy also growing at the fastest pace out of the G7 countries (Canada, France, Germany, Italy, Japan, UK and US) in the first half of 2024, we’re still positive on the outlook for UK companies.
In May we highlighted 5 UK share ideas with potential to perform this year and in the future.
We recently looked at where they are now and how they’ve performed since.