Equity markets have moved higher, helped by recent earnings results, hopes of progress on U.S./China trade talks and some hints that economic gloom could eventually clear. But do earnings expectations still need recalibration?

1. Q4 2018 U.S. earnings growth was strong, but lower 2019 earnings expectations cast a shadow and may help keep the Fed cautious.

In the U.S., the Q4 2018 corporate earnings season is coming to a close. YoY earnings growth, although the slowest for several quarters, was still comfortably in double digits with cyclicals leading the way (page 2). But what is perhaps more important is the downgrading in earnings expectations, with markets expecting only around 5% earnings growth in 2019. This downturn in earnings expectations sits uneasily with recent market gains and could encourage a brief consolidation, although we stay positive on equities overall – our 12-month forecast for the S&P500 is 2,850. Against this background, the Fed will continue to take a very careful approach to policy pronouncements: the January FOMC meeting minutes, released this week, were a study in ambiguity, being broadly dovish but leaving the door open to rate hikes later this year. The minutes also revealed by all FOMC members thought that it "would be desirable" to halt the ongoing reduction of the Fed’s balance sheet later this year.


2. In Europe, buoyant markets contrast with economic gloom: we think 2019 earnings expectations may still be too high.

Q4 2018 earnings results in Europe have proved better than some expected, and have not stopped further gains to European markets. More than half of STOXX Europe 600 companies have results, with blended earnings growth currently standing at 2.5%. Energy and Utilities sectors have been clear gainers, but Financials and Consumer Services have found the going tougher. The focus remains on European economic data: general gloom has not been lifted by February’s mixed PMI data (page 3) and, having now ended quantitative easing stimulus, there are some questions around what the ECB might do next. Given this uncertainty, we think that FY2019 consensus earnings growth expectations for European earnings could still be a bit too optimistic.


3. Asian FX as well as equity markets have benefited from better investor sentiment – but short-term volatility is possible.

Better investor sentiment in Asia has been manifest not only through stock markets (with, for example, the CSI 300 up around 8% over the last month) but also through stronger Asian emerging market currencies, as we discuss on page 5. Here too, positive factors include an apparently more dovish Fed and hopes of progress on U.S./China trade talks. China’s willingness to introducing more stimulus measures, and to keep the CNY relatively stable are probably helping too. Still subdued oil prices, even after recent gains (page 8), are also reducing pressure on some Asian economies’ external balances. But, here too, global growth concerns could still cause some short-term volatility.


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