"This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Stock markets took an upturn in October, led by commodity-related companies which had dropped sharply. So is this the big turnaround? It's obviously impossible to say, or as Sir Winston Churchill would have put it:

"This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." Sir Winston Churchill

Now that large numbers of the Nordic companies have presented their quarterly reports, we can observe that they have been weaker than expected overall. It is worth pointing out that expectations, particularly for the cyclical sectors, were reduced considerably ahead of the reporting season. The number of companies that have reported weaker sales, operating profit and earnings per share has far exceeded the positive deviations. Despite this outcome, a majority of the reports have been received with positive share-price effects (see graph below).

Graph 1. Outcomes for Nordic Large Caps for third quarter

We find the strongest reports in the consumer sector, where companies like Axfood, Autoliv, Electrolux, KappAhl, MQ, SCA and XXL particularly distinguished themselves. Forest products and packaging companies like BillerudKorsnäs and Stora Enso also beat expectations and showed good outlooks.

Graph 2. Report outcomes (sales and operating profit) by company against stock market expectations

The reporting season otherwise started in a tumultuous manner, when SKF presented a report that was clearly below expectations. The company also projects that demand for its products and services will be lower than in last year's fourth quarter. The share price plummeted and took most cyclical shares with it. Fortunately, SKF's report was not a bellwether for the rest of the reporting season, although it managed to further lower expectations. Growth remains weak for engineering stocks, and their outlooks are in many cases muted. The reports have been rescued, as previously, by the weaker currency and that many companies have retained good cost control. Among the cyclical companies that reported, Autoliv, Hexagon, Mycronic, Tomra, Trelleborg and Volvo stand out on the upside, while Ericsson, Haldex and SSAB met a negative reception.

The big downside surprise during the reporting season was banking stocks, with weak reports in both Sweden and the rest of the Nordics. Lower profit expectations and higher capital requirements mean that the market is lowering the dividend capacity of banks for the coming years, which is obviously negative for the sector.

To summarise the reporting season, analysts continue to downwardly revise earnings expectations for most companies. Overall, the market expects approximately 80 percent of Nordic companies to present improved results for 2016 over 2015. I am sceptical about this, as it would imply that large parts of each industry's value chain will improve their profitability simultaneously. This means that, in the near term, we will see the same trends as before, with earnings expectations being downwardly revised, uncertainty about growth in emerging countries and with central banks continuing to stimulate. In this market environment, we therefore maintain a cautious approach, with a continued focus on quality companies with sound finances in industries that offer good growth potential.

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