Earnings – outlook worsens, but growth cycle still alive

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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 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.

According to FT Alphaville, Citi summarized its earnings outlook as follows:

“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. …

“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.”

Source: FT Alphaville, August 23, 2011.

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3 comments to Earnings – outlook worsens, but growth cycle still alive

  • I agree. Stocks are so cheap. The price to book ratio might decrease, but it is already low enough to be worthy of investing

  • [...] post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail. Earnings – outlook worsens, but growth cycle still alive was first posted on August 24, 2011 at 10:00 am.©2011 “Investment Postcards from Cape [...]

  • Daniel

    The TTM P/E ratio for the US market is at 15.6 while Shiller’s P/E10 ratio is at 22.7. (Source: advisorperspectives.com)
    But on a global view I agree with Citi.
    Too bad you always hear only about the US market valuations. Most people forget there’s a whole world of markets which seem to be quite cheap at the moment.
    As far as a recession in Europe is concerned: The probability may be the highest, but on the other hand it’s the market where a recession is priced in the most.

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