Low earnings growth: Is it all that bad?

Highlights:

• Global corporate earnings have been hit by the US-China trade war, Brexit fears and the car sector slump – all weighing on a maturing economic cycle. The 2019 earnings forecast decreased by 12% in one year, showing no growth vs 2018.
• US and EA momentum in capacity utilization deteriorated together with firms’ margins, ROE and NIPA profits. More recently, flash estimates of Q3 US unit-labor costs growth increased visibly to 3.1% yoy, one of the highest since 2008.
• While falling earnings were justified by worsening fundamentals, a too bearish consensus for Q3 resulted in positive surprises, near recent history. Furthermore, fresh confidence indicators are providing tentative signs of cycle stabilization.
• While we expect a mild earnings recovery in 2020, our forecasts remain weak and below consensus by 6-9 pp for the US, EA and EMs. In our projections, the low earnings growth environment will persist over the next 5 years.
• While 2020 consensus earnings remain at risk, we maintain a constructive stance on equities due to dovish global central banks, high equity risk premia, decreasing geopolitical risks, defensive positioning and signs of macro stabilization.

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