Earnings – outlook worsens, but growth cycle still alive

Article written by Prieur du Plessis, editor of the href="http://www.investmentpostcards.com">Investment Postcards from Cape Town blog. /> style="text-align: justify;">One of my major concerns regarding stock market valuations is the earnings outlook, and specifically that profit growth would not be at a level to support share prices. What are the chances of a profits recession? The chart below, courtesy of Citigroup (via href="http://ftalphaville.ft.com/blog/2011/08/23/660411/closer-to-profits-recession-global-edition/" >FT Alphaville), provides the answer based on a proprietary model comprising factors that historically have predicted profits recessions. Interestingly, Europe bears the highest risk and the U.S. the least.

style="text-align: justify;"> href="http://av.r.ftdata.co.uk/files/2011/08/CitiIndexEarnings.jpg" > class="alignnone size-full wp-image-33478" style="border: 1.5px solid black;" title="grafiek1" src="http://www.investmentpostcards.com/wp-content/uploads/2011/08/grafiek1.jpg" alt="" width="515" height="457" />

style="text-align: justify;">According to href="http://ftalphaville.ft.com/blog/2011/08/23/660411/closer-to-profits-recession-global-edition/" >FT Alphaville, Citi summarized its earnings outlook as follows:

style="text-align: justify;">“Our new forecast for global EPS growth is 12% for 2011 (previously 18%) and 9% in 2012 (11%). Bottom-up consensus forecasts for 2012 are 15%, while the stock market is discounting a 5-10% contraction, in our view… We believe global stock prices will continue to grind higher with EPS until there are clearer signs of a peak in the current global profits cycle. Our best guess is that this peak will be sometime in 2013 — beyond the horizon for most investors. …

style="text-align: justify;">“Equity markets are, quite reasonably, questioning the sustainability of current corporate earnings and may even be starting to price in a fall in profits. Valuations for global equities are approaching lows we saw in the 2008-09 bear market when EPS halved. Global equities trade on 1.6x price to book (1.2x in March 2009). The long-term average has been 2.1x. The global price to trend (10-year average) earnings ratio is 16.8x (25x is the long-term average). Outside of the recent bear market, both these measures suggest equities are as cheap as they were in the early/mid-1980s. There seems to be plenty of bad news discounted.”

style="text-align: justify;">Source: href="http://ftalphaville.ft.com/blog/2011/08/23/660411/closer-to-profits-recession-global-edition/" >FT Alphaville, August 23, 2011.

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style="border-top:black solid 1px" /> href="http://www.investmentpostcards.com/2011/08/24/earnings-%E2%80%93-outlook-worsens-but-growth-cycle-still-alive/">Earnings – outlook worsens, but growth cycle still alive was first posted on August 24, 2011 at 10:00 am. />©2011 “ href="http://www.investmentpostcards.com">Investment Postcards from Cape Town“. Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at wordpress@investmentpostcards.com /> /> style="font-size: 0.8em">Feed enhanced by the href="http://ajaydsouza.com/wordpress/plugins/add-to-feed/">Add To Feed Plugin by href="http://ajaydsouza.com/">Ajay D’Souza />