This week we have another mixed bag of macro signals.

Let’s start with some bad news – sagging earnings growth in Europe. Analysts at Morgan Stanley have just out a flash note at the beginning of the third quarter. The top line – “ early indications suggest a weak earnings season with more EPS misses than beats for the first time since 4Q14.” The most likely culprit – a continuation of margin pressure as EPS has been weaker than in-line sales results. Clearly, weak earnings growth is not a helpful signal and if the current season carries on getting worse we could see a sell-off in Europe although the report does contain the germ of a positive investment idea – which is to buy value stocks.

Digging down into the data the MS team has looked at the limited set of results so far and found that the numbers are fairly “lacklustre. We’ve seen 23% of companies beat EPS expectations and 32% miss, giving a net miss of 9% of companies. This would be the first net miss since 4Q14. ….. One of the key themes to come out of 2Q results season was signs of margin pressure, as a strong top-line beat was met with merely okay earnings figures. Again we highlight that we only have limited results so far, but sales have seen a small net beat relative to the earnings miss, suggesting margin pressures continuing. “

Looking at different styles of investing the MS analysts observe that “earnings revisions of Value vs Growth have risen to a 7 month high, and the early signs from earnings season suggest this continuing. Value stocks have actually seen a net EPS beat, while Growth stocks have to date been the source of disappointment.”

Obviously, it’s still very early days for the Q3 season but the omens aren’t good.

But then again, perhaps we’re being too dismal in our reading of the tea leaves! If earnings are a bit lacklustre maybe they’ll be helped along by surging dividend growth? The good news on this score – a backwards-looking one for sure, with lots of lagginess – is that the latest Link Asset Services report suggests that UK dividends are booming. According to Link “ UK dividends rose 4.1% to £32.3bn in Q3, breaking a third-quarter record, according to the latest UK Dividend Monitor from Link Asset Services. Underlying payouts, which exclude special dividends, reached £31.6bn, a rise of 6.9% year-on-year.” Other research highlights include:

  • UK dividends climbed by 4.1% to £32.3bn at the headline level, a third-quarter record and that underlying dividends (i.e. excluding specials) rose 6.9% to £31.6bn, an all-time quarterly record
  • Underlying dividends (i.e. excluding specials) rose 6.9% to £31.6bn, an all-time quarterly record
  • Banks and mining companies helped boost the total; retail stood out as weak spot
  • Top 100 firms outperform mid-caps owing to a strong showing from a small number of large companies
  • Falling share prices and rising dividends meant equity yields jumped to 4.1%
  • Link upgrades its 2018 forecast for headline dividends by £1.1bn to a record £99.5bn, an increase of 4.8%