Earnings estimates stuck in low gear

Now, several months after Trump’s election there has been ample time for the corporate sector to re-evaluate the 2017 outlook in respect of improved economic optimism. However, we have found that earnings upgrades have not to date followed positive economic surprises. In the past, short-term market direction has been closely linked to earnings momentum and the current absence of upgrades points to a period of sluggish market performance.

Exhibit 1: Since Q4 positive economic surprise has not fed into earnings estimates

In the US and UK, 2017 earnings forecasts have slipped just under 1% over the last month while Europe ex-UK has benefited from a small upgrade, Exhibit 2. The surge in global earnings estimates from mining and energy has receded as commodity and energy prices stabilise.

Exhibit 2: Unweighted 2017 earnings forecast slipping in US and UK over past month

These revisions leave median consensus earnings growth forecasts for these markets in the upper single digits for 2017/16, although we should highlight that the historical pattern is for growth forecasts to steadily ebb during the financial year, by approximately 3-4%. To us, merely mid-single digit earnings growth, a result of the maturity of the economic cycle, appears inadequate compensation for owning equities at current premiums to historical averages.

The contrast between significantly increased investor and corporate optimism as expressed in survey data and the sluggishness of consensus earnings forecasts is also striking. There seems to be a reluctance within the corporate sector (and corporate guidance has a large influence on consensus earnings forecasts) to put a specific number on this optimism in terms of increased profits. We can understand this unwillingness in the absence of concrete proposals from Trump. But we question how large an investor’s bet should be on what is already proving to be a highly controversial US administration.