Earnings Momentum Negative: As we approach 1H15 results season, we note that momentum in consensus earnings forecasts has in aggregate stepped down considerably – with Metals & Mining and Energy sectors driving the core of momentum. Aggregate FY15 EPSg for the ASX 200 has now fallen from 6.6% to sub 3% over the last six months.
But Growth Expectations are still High for Industrials: FY15e EPSg for Industrials ex Financials (the real economy) is still robust at 8.8% and for consumer discretionary, this is even higher. We see risk to this growth profile in light of what we view as a deteriorating domestic macro backdrop and as highlighted in our surprises note (Australia Macro+: Asia Insight: 10 Surprises That Would Matter, 27 Jan 2015), a negative growth outcome for industrials this year would challenge sentiment and positioning.
Risk to Market Multiple lies in Industrial EPS: Our chart of the week highlights the current disconnect between the current market multiple and trend in earnings. Yield hunting and PE expansion for global growers and earnings defensives has seen the market multiple paid for earnings hold up. A crack in Industrial growth forecasts would challenge the current elevated valuation levels relative to what we expect will be continued negative earnings momentum.
In short, the stock market is pricing for two outcomes. The first is that EPS growth is going to suck. The second is that interest rates are going to fall and therefore anything with a yield is going to get more expensive.
Does anyone not think that CBA is hitting record highs because of imminent rate hikes?
Ipso facto, no rate cut or hint of a near term easing tomorrow and the dollar and stocks will reverse current trajectories.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
