As usual, the place to start is the US. There is a growing consensus that the the high valuations of some US corporations and the impact on the various sector and overall indices are not justified by either current earnings or macroeconomic and political fundamentals. Growth in Earnings of S & P 500 constituents has been negative year-on-year for the first three quarters of 2019 but a recovery in Q4 may just about keep the year positive overall, albeit sharply lower than in 2017 and 2018 (Figure). Sales are also expected to be considerably lower. More than likely is the usual pantomine of companies’ talking down analysts forecasts only to go on and outperform.

Factset are the experts on such matters and for 2020 have already collated no less than 10,362 analyst estimates for S & P 500 constituents. Unsurprisingly, only 7% are Sell ratings and just over 50% are Buys. The favourites are in the Energy, Materials, Industrial and Consumer Discretionary Sectors while the laggards are expected to be in the Real Estate, Financial Utilities Sectors. Overall, these ratings look bullish. Companies with major operations outside the US are forecast to fare rather better than those more domestically-focussed, which is consistent with another widely-held view that European and Asian (including EM) stocks should see higher earnings in 2020.

However, and somewhat alarmingly, there is no consensus as to whether Earnings and Sales will affect either the share prices of the ‘favoured’ companies or the overall market indices. The optimists expect a positive outcome for US-China trade negotiations and avoidance of a dispute with the EU, more tax cuts and other electioneering measures in the US, China’s economy stabilising, the end of austerity in Europe,a global economic recovery, continuing central bank intervention and a wall of money with nowhere else to go. The more cautious boggle over record Price/Earnings multiples, wonder how long companies can keep borrowing for share buy-backs and dividends, fret over lack of strategic government and corporate investment and discount central banks’ scope for action. The pessimists see failed monetary policy, political ineptitude and, above all, an unsustainable and growing mountain of debt (household, corporate and government) leading inexorably to a new Great Financial Crisis.

What could possibly go wrong (part 2)?

Overall, despite or because of the 2019 bonus year there are plenty of shadows overhanging financial markets. and investors may well have to work hard just to stand still. Extreme polarised opinions on the prospects for the global economy and financial markets are at best a distraction and could yet result in self-inflicted harm. Global Equity Analyst Chris Bailey addressed this challenge in his address to the Global Alliance Partners Conference in Dubai in November. Below are some direct quotes and a cautionary message to central banks:

-Prefer equities especially world ex-US equities
-Bonds as ballast maybe but not big total return generators
-When year-on-year corporate earnings growth is this patchy in firmly valued markets…then buy
stocks not indices The rise of passive just means rewards for active conviction is even higher!
-Rotation smells like opportunity… like sentiment mean-reversion trades
-There is never a valuation silver bullet…but expect alpha generation opportunities in the -upcoming decade (but lower absolute returns)
-Mind the gap with growth names and high debt level stocks

Wise words, indeed!