With more than half of the first quarter earnings reports from benchmark S&P 500 companies out of the way Peter Garnry, Equity Strategist, Saxo Bank talks with Yvette Roper on TradingFloor.com about the trends that have emerged and which sectors are the best and worst performers. He particularly looks at information technology - the leader of the pack, yet again, in terms of sales and net income.

He says that a lot of the reason for the IT sector’s outperformance is due to Apple, but there’s also a good development across the board from other IT companies, with a clear reinvestment cycle going on in terms of new equipment and infrastructure for companies.

Regarding the worst performers, utilities and mining have suffered the most. Utilities particularly felt the impact of an extremely mild winter in the US. Materials and mining is hurting due to rising costs from late stage extraction of minerals.

Regarding the earnings surprise ratio it is one of the highest seen since 2001. This bodes well for the overall health of companies, says Peter, adding that low expectations played a contributory role in the high surprise ratio.

Companies in general have benefited from what Peter says is ‘okay’ growth in the US and Asian economies, with the latter playing a key role. More and more growth from Asia will continue to drive the large caps’ good performance.

The impact of the global economic slowdown on company earnings is being largely offset by Asian growth. Sales growth is around 5.5 to 6 percent which is slightly above annual growth rates since 1999. But with no more tailwinds from profit margins in sight it’s essential that going forward companies get some more real sales growth, otherwise aggregate earnings will begin to flatten, says Peter.

Profit margin contraction in 7 out of 10 sectors is a concern, says Peter, drawing attention to commodity prices which are still at fairly high levels and will take some time before they spill into the operations of multi-national companies. Then there’s the issue of rising unit labour costs in the US. US personal incomes have been flat for the last two years and we expect some wage pressure developing which will make it difficult for companies to maintain their profit margins, says Peter.

On European stocks, Peter rates the first quarter earnings season as satisfactory but 'no party'. There’s no doubt US stocks are performing much better than European stocks but within Europe there are two sub sectors in the consumer discretionary sector that are performing very well – automobiles and luxury goods, which are benefitting from Asian demand.


See more of Peter's market commentary on TradingFloor.com