Profits forecasts stable – but no positive surprises

While Q3 has brought something of a renaissance in economic surprise and purchasing managers’ indices we can at present see no sign of this improved sentiment in profits forecasts for 2017. Our weighted average consensus earnings forecast index remains steady for each of the UK, US and Europe ex-UK and the equal-weighted measures have declined, if modestly, since mid-year. In prior periods, our earnings forecast index tended to move slightly ahead of PMIs and economic surprise. The more recent data has not followed this pattern and highlights that what is good for the overall economy is not by necessity good for corporate profits. Furthermore, with central banks on a tightening path the risk for equity markets is that tighter policy is not offset by stronger profits growth.

Exhibit 1: 2017 US, UK and Europe ex-UK earnings revisions index stable

Exhibit 2: Equal weighted revisions index shows declining momentum since mid-year

Exhibit 3: Earnings revisions data contrasts with improving economic surprise