Low earnings expectations without economic contraction is not necessarily bad for US equities
Over the past three months, US earnings expectations for the upcoming reporting season have been dramatically lowered. Indeed, nine out of the ten GICS sectors have experienced lower estimates, with only industrials defying the trend due to compositional changes, rather than authentic upgrades. At present, US EPS downgrades are outpacing upgrades by a ratio of five to one with expected EPS growth in 2015 having halved in the past six months to +4%. But weak earnings growth has not historically been a canary in the coal mine for investors. Indeed, there have only been three occurrences in the past four decades where earnings declines have not coincided with economic recession (in 1986, 1998 and 2012). In all three of these periods the markets continued to rally for the subsequent 12 months, irrespective of earnings growth or valuations, which suggests low earnings expectations without economic contraction is not necessarily bad for US equities. However, none of these periods included increases in both US interest rates and the US currency which is very likely in the next 12 months.
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