by David Templeton, Horan Capital Advisors
A recent report by Thomson Reuters' AlphaNow provides a chart review package covering current financial data often paired with current economic data. The report released for August, along with an updated chart for September, shows all of the global equity market sectors within the MSCI World Index are trading at or above their 5-year average forward P/Es or multiples. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
A question that arises then is whether or not earnings growth can do better than the recent mid single digit growth rates reported so far this year. For the second quarter of this year earnings growth will come in at about 3.6%. According to Factset's Earnings Insight Report, expectations for the third quarter are earnings growth will increase to 6.5%. This increase in the growth rate would certainly be viewed positively by the equity market.
One positive data point is the Citigroup Economic Surprise Index which has been showing improvement. According to Bloomberg, this index is defined as:
"The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets."
As the below chart notes, this index tends to be a leading indicator of a more robust earnings growth environment.
For investors looking at a potentially improving euro zone economy, the Surprise Index is also exhibiting strength. For investors looking to increase euro zone exposure they will want to at least be aware of the banking issues in France as outlined in the report, From Behind the Maginot Line.
Source: Business Insider
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