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Global Equities: Peak Growth, Not Peak Earnings – July 26, 2021

A lot of bullish news has been priced into global equity markets since November and a moderation in economic growth rates looms. However, the corporate earnings recovery is not at risk.

A just-published report examined a number of topical investment issues, including the outlook for global corporate earnings. Forward earnings momentum is closely correlated with swings in the U.S. ISM® manufacturing index as a proxy for global growth momentum. In turn, the ISM® is elevated by historical standards and likely has peaked. Our research has shown that equity returns have been substantially below average in the year following ISM® readings that are more than one standard deviations above the historical mean, as is currently the case.

However, the inevitable slowdown in global economic and earnings growth in the year ahead should not be mistaken for sustained fundamental weakness. The level of 12-month forward earnings peaks at or near the end of the cycle, underscoring that earnings should be expected to trend higher until recessionary pressures develop. Such pressures are nowhere in sight.

Mid-cycle equity corrections are normal, but global forward earnings will be higher in a year, thereby providing solid support under stock prices.