The hidden dispersion: from company fundamentals to portfolio strategy

Recent results are sending an important signal. Despite a difficult macroeconomic environment, earnings are not deteriorating across the board.

We have argued for several months that the economic shock could reach companies with delays. We still think this mechanism matters. Costs move through inventories and contracts gradually, customers take time to adjust their behaviour, and existing order books can protect activity for a while.

But delay can no longer be the only explanation.

If results prove less bad than expected, we must take that information seriously. The more interesting question is therefore becoming not simply when the shock arrives, but where it arrives and who is able to absorb it.

The first distinction is between sectors. Some effects are relatively straightforward. Higher energy prices initially benefit oil producers and hurt energy-intensive businesses. Higher defense and infrastructure spending supports companies exposed to those areas. Weaker real incomes are more challenging for discretionary consumption.

But even these conclusions can change over time. Oil producers may initially benefit from higher prices, but if those prices eventually destroy demand and weaken economic activity, the second-order effect can turn against them. What looks like a beneficiary in the first phase of a shock may therefore become exposed to its consequences later.

The second distinction is within sectors. And this may ultimately matter even more for investors, because the same shock can weaken an industry while simultaneously strengthening some of its participants at the expense of others.