Executive Summary

Climbing Out of the Trough. In the US, the Europe/Australasia/Far East (EAFE) region and in Emerging Markets, earnings seem on track to keep climbing out of the 2016 trough.

Regional Preferences. Developed Markets look more attractive than Emerging Markets. Within Developed Markets, the EAFE region — and Europe in particular —looks more attractive than the US.

Sector Outlook. In the US, the Information Technology and Financials sectors are expected to remain the largest contributors to S&P 500 earnings in 2017. The Energy sector is currently forecast to materially increase its contribution to S&P 500 EPS. Key risks for the Financials and Energy sectors: interest rates (10 year Treasury) and oil prices (WTI), which have been trending lower since the start of the year.

A Single-Digit Gain in US Equity Markets Seems Plausible. Since 2010, the start-of-the-year expectation for US EPS has, on average, been too high by 11%. If the current estimate of 2017 earnings declined by the average 11%, that would imply a 9% gain in 2017 earnings. If P/E multiples remain stable, US stock prices could also rise by a single digit amount in 2017.

Figure 1:  Index of Earnings for Three Regions (2010 = 100) Source:  S&P, MSCI, Cornerstone Capital Group

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Michael Geraghty is the Global Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry.