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Equity Perspectives

Analyst earnings expectations have steadily become less negative, suggesting an inflection point for corporate profits may be near. Meanwhile, key global manufacturing indicators continue to improve.

While they may not presage a springtime explosion of “green shoots,” recent data reports suggest conditions are steadily improving for global equities, especially with regard to corporate earnings expectations. Specifically, global analyst earnings revisions have turned significantly less negative as companies report their actual results for the first quarter of 2019 and provide guidance for future periods.

Based on data from a May 2, 2019, J.P. Morgan report,1 earnings revisions showed the greatest improvements in the most recent week (ended April 30, 2019) in the United States, Asia excluding Japan (i.e., China), and Europe. The balance of these revisions is still negative, with the most recent reading at -3.8%—but that’s only slightly worse than the typical -2.0% seasonal markdown in April. That’s a very large improvement from the -17.0% balance at the beginning of April.

The upshot: Current global equity valuations based on forward earnings expectations appear to be on a much more stable footing. According to the May 2 J.P. Morgan report, the valuation of global equities was almost exactly on par with the median forward earnings multiple over the past 25 years. Meanwhile, U.S. equities were trading at an 8% premium to their 25-year median multiple, but were almost exactly in line with their average over the past three years, and at around 17x, were priced well below the peak multiple of 18.5x reached at the end of 2017 (by comparison, stocks traded at a multiple of more than 24x during the dot-com boom two decades ago).

These encouraging developments come amid signs of a nascent renewal in global economic growth. April reports on purchasing manager sentiment in China’s key trading partners in northeast Asia—Taiwan, South Korea, Thailand, and Vietnam—improved, on average, for the second consecutive month in April, according to data from Bloomberg. The improvement took place despite a shortfall in Taiwan, a consequence of particular sluggishness in the tech and telecom industries. This suggests that the modest dip in the purchasing manager sentiment in China was not indicative of an even worse underlying problem, and that a genuine recovery may be underway.

Beyond Northeast Asia, signs of a global economic recovery have been proliferating. Forecasts for the performance of key indicators are being met or exceeded worldwide much more frequently than they were a month ago, based on J.P. Morgan data. This is taking place after an extended period of persistent shortfalls and it implies that forecasters may have lowered their economic growth expectations too aggressively.

Taken together, these signals suggest a steady easing in the negative factors that have affected global equity markets during the past several months. Should these trends remain in place—and we believe they are poised to continue—global equity investors may find themselves in a much more favorable environment in the months to come.

 

1”The Earnings Landscape,” J.P. Morgan, May 2, 2019.

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