Micro versus macro
There is little doubt that the latest U.S. earnings season has been a good one for long-equity investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth — both actual and that still forecast for those who have not filed yet — has come in at 36 percent.
Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street. Some 75 percent of reports have been better than expected. Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.
But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won’t last.
We expect the micro data to dominate in the short term and support a temporary recovery in the equity markets. Nevertheless, investors should consider reducing their risk positions in strong market phases ahead of the expected slowdown in growth.
Gavyn Davies, the chairman of Fulcrum Asset Management who now blogs as Econoclast for the Financial Times, reckons a lot of it has to do with a belief that the U.S. economy is not as dominant as it once was.
“The markets appear to be taking the view that other countries are able to withstand the slowdown in the US, and if all else fails, then the Chinese government and the Federal Reserve will come to the rescue. Surely they are not just whistling in the dark – are they?”
The current debate about whether the U.S. economy will double dip into recession and the not-unrelated one about whether decoupling — China to the rescue etc — can really work are obviously key to this micro versus macro dichotomy. But success if also often fleeting.
My colleague Dominic Lau notes in an analysis that the potential global slowdown is already prompting at least European equities analysts to predict less robust earnings next year.
Companies in the MSCI Europe index are forecast to post an 18.4-percent rise in earnings in 2011, according to Thomson Reuters I/B/E/S data, after an expected increase of 33 percent this year. With U.S. consumer spending looking weak, China reining in its booming property market and Europe on an austerity diet, even this may be optimistic, leading to further cuts.