Global Earnings Revisions Still On A Downward Trend

Equities bridging a gap in corporate performance - for now

Consensus profits forecasts on a global basis remain on a downward trend even as January’s recovery in risk assets such as equities and corporate debt continues into February. The primary reason for this at first sight paradoxical state of affairs is not hard to find; the US Fed has placed interest rates on pause and acknowledged the slowing of the global economy. Nevertheless, the clock is ticking on the persistence of the current profits downgrade cycle, which is also consistent with economic weakness evident outside the US. While not shifting our neutral stance on equities for the full year, near-term market performance is now in our view more tightly bound than usual to the turn in the direction of global profits forecasts. Therefore, in the short-term, we would not chase the rally, at least until there is some evidence of stabilization in earnings or positive news in respect of US/China trade.

Global consensus profits forecasts for 2019 remain unequivocally on downward trend during the first few weeks of the year based on our calculations, whether on the unweighted basis shown below or on a weighted basis. Emerging market forecasts have been declining the fastest, followed by Europe and finally the US where profits estimates have shown the greatest resilience. Within developed markets, the consensus forecast data also tracks economic surprise indices, which show weaker-than-expected economic data in the eurozone.

Exhibit 1: Unweighted consensus 2019 profits index continues to show negative momentum

Profits forecasts for emerging markets are falling meaningfully faster than developed peers. This is now a concern in our view in respect of the outlook for emerging markets which have rebounded strongly during Q119. Unlike developed markets where negative momentum has been unhelpful for sentiment but relatively modest in total, downgrades in emerging markets have cut deeper. For the emerging market industrials sector, for example, unweighted 2019 forecasts have in total fallen by 25% over the past 12 months.

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Disclaimer: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing ...

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