Is Q4 earnings optimism misplaced?
In a highly uncertain macroeconomic and geopolitical backdrop, the fourth-quarter (Q4) earnings season is of particular importance. Indeed, with developed equity markets’ valuations reaching levels not seen since the “dotcom” bubble twenty years ago, we believe that stocks need improving fundamentals to sustain their march higher.
Another low bar
At face value, expectations again appear low with analysts forecasting that US companies, on aggregate, will deliver next to no earnings growth in Q4. At the sector level, alongside US financials – most of which have already published much better than anticipated results – utilities are expected to report double-digit growth. On the other hand, energy and materials will likely see earnings decline on the back of weak commodity prices (versus the same period last year).
While slightly more encouraging, the picture in Europe is not bright either, with growth of just 2% expected for the region’s 300 largest companies. There, the technology and telecommunications sectors are likely to drive earnings higher.
Mind the gap
Although we expect to see a very modest year-on-year increase in earnings, the fourth-quarter’s results should leave full-year 2019 growth close to flat in the developed world. This is in stark contrast with the 25%+ returns experienced by equity markets over that period.
The divergence between actual results and buoyant share prices is linked to investors’ belief that 2020 will see a sharp rebound in activity. The combination of receding trade tensions, accommodative central banks and a lack of inflationary pressures are powerful tailwinds for both the top and bottom lines of most companies. In fact, these hopes appear so prevalent that we would not be surprised if investors were willing to give management teams the benefit of the doubt even if Q4 results disappoint.
Limited room for error
While, in light of the very recent positive development on the trade front, investors may give company management the benefit of the doubt, this is likely to be case only if forward guidance remains positive. Indeed, equity markets are already factoring in high single-digit earnings growth for 2020. Assuming that profits expand by mid-single digits only, then global developed equities are trading at a price-to-forward earnings ratio of around 18.5, a level last seen just before (and after) the 2000 tech-led bubble. Shares can, from time to time, decouple from fundamentals but this tends not to last forever.
No crash but volatility ahead
Admittedly the world has changed a lot in 20 years. Other than elevated equity valuations – which can be justified by ultra-low interest rates – we see no parallel between what happened in the early 2000s and what investors face today. Indeed, we see no signs of “irrational exuberance” yet, the vast majority of companies are highly profitable and central banks are far from tightening monetary policy given the inflation outlook.
As such, we continue to see equities as one of the most attractive asset classes over the medium term. But we also recognise that markets do not go up in a straight line and that the current backdrop leaves valuations prone to bouts of volatility (as already experienced this year).
Be mindful, not fearful
We reiterate the key message from our Outlook 2020: staying invested remains the most suitable course of action for long-term investors. But appropriate diversification and risk management will be paramount to protect and grow capital this year.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This document has been issued by the Investments division at Barclays Private Banking division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.