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Why a powerful begin to the earnings season gained't cease the decline in international shares

The Wall Street sign can be seen in front of the New York Stock Exchange (NYSE) in New York on February 16, 2021.

Brendan McDermid | Reuters

LONDON – The corporate earnings season has got off to a rapid start, but the positive surprises have so far not created any upward momentum in global equity markets.

By Friday morning, 13% of companies in Europe and 20% in the US had reported earnings for the first quarter, with the majority beating consensus expectations.

Barclays analysts highlighted on Friday that earnings per share (EPS) growth has been particularly strong at 107% year-over-year in Europe and 63% in the US.

Barclays pointed out that EPS beats are above average for a reporting season of 74% in Europe and 83% in the US, while sales growth versus consensus in Europe has surprised positively, with 4% leading the beats in US financials All European financial data have so far delivered positive surprises in terms of earnings per share.

Both European and US markets are slightly bearish this week, however, and Barclays head of European equity strategy Emmanuel Cau suggested that high earnings expectations are largely priced into the markets after their impressive run and revaluation over the past year were.

"Our view that reporting season may turn out to be a 'travel and arrive' case seems to be emerging so far," Cau said in the note.

"The average stock price response to the results is indeed negative, despite strong estimates, especially in the US, while it is largely flat in Europe."

Cau noted that a similar pattern had emerged in the previous two profit seasons, with stock markets rebounding ahead of time and starting to rebound after a period of digestion.

Marcus Morris-Eyton, portfolio manager at Allianz Global Investors, told CNBC on Thursday that the earnings season is expected to be strong due to "very good macroeconomic tailwinds" and that it is expected to continue into the next few quarters, particularly in Europe.

"The challenge for us as investors, however, is that expectations are very high. Therefore, these companies must either meet or exceed expectations," Morris-Eyton told CNBC's "Squawk Box Europe".

"You've seen quite a few examples of companies reporting inline numbers before, but it wasn't good enough for the market."

"Correction Concerns"

Robust earnings will be important for equity markets to continue their general rally, but overbought technical data, broadly bullish positioning, and the seasonal “sell in May” mindset could put stocks in the “danger zone” of retreat if a negative catalyst occurs. Suggested Cau.

"Most obvious would be the emergence of a vaccine-resistant (coronavirus) variant, but geopolitical flares or a Hawk political surprise could also hurt sentiment," he said.

"We also recently warned of regulatory / tax risks that have been largely ignored by the markets."

The latter came to the fore on Thursday as the markets were startled by reports that US President Joe Biden's administration was considering increasing capital gains tax as part of its new economic package.

"Many indicators have been stretched for some time and it would have been premature to reduce risk in the face of improving fundamentals, but there now seems to be less room for error should something go wrong," said Cau.

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