Equity investors have clearly taken some comfort from Trump’s recent address to the US Congress. While the speech was delivered with some unanticipated polish, there was in our view little new policy detail and we were surprised by the resulting surge in global equity markets. In our view, investors and the corporate sector will struggle to incorporate Trump’s fiscal initiatives into capital spending plans and profits expectations until more detail becomes available Therefore, in an enviroment where US earnings forecasts are declining, we continue to question the sustainability of the bull market in US equities.
Since mid-February median US earnings estimates for 2017 have fallen by 1%, Exhibit 1. On a weighted average basis the decline is less at 0.5% but the direction the same. These declines in profits forecasts seem at odds with the near-euphoria evident in the strong performance of the S&P 500, which has risen by 5% over the same period. The gap between fundamentals and market prices therefore continues to widen.
The situation is different in the UK where the FTSE 100 has been supported by a rising trend in earnings forecasts, in part due to the decline in sterling. While Exhibit 3 suggests there is no ‘gap risk’ in the UK, we note that median estimates have declined in the year to date while the weighted average is effectively unchanged. We suggest investors are watchful for a change in the direction of UK earnings forecasts as recently UK PMI indices have lost momentum.
In continental Europe, there has been something of a rebound in earnings forecasts, with the median for 2017 rising by 1% since the start of the year, Exhibit 1. However, this seems fully priced into European equities, given the strong market performance since December.