2017 Estimates Still Seem Overly Optimistic. While the initial estimate of 2015 earnings was below the initial estimate of 2014 earnings, and the initial 2016 estimate was below the initial 2015 estimate, the initial consensus estimate for 2017 EPS is materially above the initial estimate for 2016. Consensus estimates currently imply a 34% gain in global earnings in 2017. Annual earnings growth has not exceeded 13% in any of the past six years.
Bottom-Up Estimates Also Seem Too Optimistic. Driven by interest rate and oil price movements, the Financials and Energy sectors had the biggest declines in earnings in 2016. (The yield on the 10-year U.S. Treasury declined in H1 2016; oil prices spent most of 2016 below $50.) The consensus estimate is for those two sectors to have the biggest earnings gains in 2017, which seems dependent on a further steepening of yield curves and materially higher oil prices.
A Single-Digit Gain in 2017 Seems Plausible. Since 2010 the start-of-the-year expectation for MSCI ACWI EPS has, on average, been too high by 15%. If the current estimate of 2017 earnings declined by the average 15%, that would imply a 14% gain in 2017 earnings. However, with estimates likely to continue falling, actual earnings growth in 2017 could well be in the single digits. If P/E multiples remain stable, global stock prices could also rise by a single digit amount in 2017.
Figure 1: MSCI ACWI EPS ̶ Start-of-Year Consensus Estimate and Actual Year-End EPS
Source: MSCI, Cornerstone Capital Group
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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.