Worries about slowing growth abruptly hacked off 7% from the MSCI US Equity
Index in October. More ominously, a growing consensus views corporate
earnings as already at their high for this cycle. Peak profits may have
We are not so sure. Yes, earnings growth will slow materially next year.
One cannot overlook the primary drivers in 2018: corporate tax cuts and the
rapidly widening U.S. government budget deficit. Crucially, these have
one-time impacts. From here, earnings growth rates will come down.
Investors who extrapolated this year’s lofty numbers will have to adjust
their narratives. And the U.S. stock market may struggle. But the absolute
level of earnings is unlikely to peak until the macro data confirm a
significant economic slowdown. We are not there yet.
Taking a wider world view of corporate profits, expectations for global
ex-U.S. earnings growth are downright sour. China is viewed as a victim of
U.S. trade brinksmanship and a rapidly slowing economy. Emerging markets
are seen as vulnerable to a virulent contagion replay of 1998. And Europe
has been left for dead.
What could go right here? Actually, quite a lot. Regularly, our investment
team peers into the BAML Global Fund Manager Survey,* a kind of investor
voyeurism, giving us statistical snapshots of our competitor’s positioning
(hey, even professionals can provide contrarian signals). November’s report
shows widespread gloom. Most fund managers expect global profits to
deteriorate over the next 12 months, their most bearish view in six years.
Negative profit expectations also marked equity lows in 2011 and 2016.
Similarly, economic expectations have collapsed: 44% expect global growth
to decelerate in 2019. This is the most negative reading since the depths
of the 2008 global financial crisis and also more depressed than equity
lows in 2011 and 2016. In other words, there is plenty of room for positive
earnings surprises outside the U.S.
Meanwhile, no one is talking about it, but emerging markets have been firm
in recent months and are likely forming a solid base. Even in China, where
the market is expecting an outright profit contraction, policy reflation is
gaining momentum. Lower interest rates, a cheaper renminbi and easier
access to credit argue for higher corporate profitability. Stock prices
should begin to reflect the improvement in the earnings outlook in advance.
We reiterate our call to rotate away from the U.S. into global exposures.
Deeply depressed sentiment, reasonable valuations, and early signs of
corporate profit improvement in many global regions make this an asset
allocator’s dream setup. Don’t miss it!
* Hat tip to Urban Carmel for providing this data:
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at firstname.lastname@example.org. Follow
Tyler on Twitter at @TylerMordy
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