By Philip Lawlor, managing director, head of global markets research
As the chart below reveals, multiple expansion was by far the biggest driver of last year’s exceptional global equity returns. Only the Russell 1000 saw positive (albeit small) contributions from both dividends and 12-month-forward EPS revisions.
This global re-rating has been dramatic: forward-12-month PE multiples have recovered significantly from their December 2018 lows across the major markets and are back above 10-year averages. Easing financial conditions, bolstered by a broadly dovish central-bank pivot, and burgeoning optimism about the global economic outlook, have fueled this rebound.
Focus shifts to 2020 earnings prospects
With valuations already elevated, it will be difficult for multiple expansion to remain a major booster of equity returns going forward. This puts the onus on a revival in earning growth to move markets higher.
The good news is that consensus forecasts anticipate a recovery in global EPS growth in 2020 and similarly healthy gains in 2021, though clearly flattered by comparison with last year’s extremely low base. Strong turnarounds for the US Russell indexes and FTSE Asia Pacific ex Japan lead the way.
The bad news is that, except for the Russell 1000, consensus 12-month-forward EPS forecasts have been in a persistent downtrend. At this stage of the market cycle, earnings revisions provide more information than forecast growth rates.
Watching for confirmation
Investors will be keenly focused on the progress of 2020 EPS revisions for signs that this profit deterioration is over. Management guidance and how that gets reflected into analyst forecasts are likely to be the key sentiment drivers in the months ahead.
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