Myles Zyblock, chief investment strategist at Dynamic Funds, on BNN, January 17, 2019, discussed how the outlook for corporate earnings growth is deteriorating, and that there have been more earnings downgrades than at any time since 2019.
"Lots of it has to do with the prior worry of rising interest rates, worries about geopolitics, such as trade, Brexit," says Zyblock.
"Global EPS (earnings per share) growth was up 20% year-on-year, which were fantastic numbers. But, at the same time, what we're seeing is the Global Leading Economic Indicator is rolling over, and its telling you that this slowdown is coming, and that earnings will follow." continued Zyblock. "So its not telling you quite yet that you're getting negative earnings growth, but definitely a slowdown. There was a concerns that the slowdown would morph into something more problematic."
"What you want to see, I think the last piece of the puzzle to get a sustained move in the markets, is for those global leading indicators to bottom, and to start turning up. If that happens, that takes some of the fundamental pressure off the markets," explained Zyblock.
"Right now the concern, around valuations, is about the lack of growth and rising interest rates; that has absolutely smashed valuations lower around the world."
"Corporate earnings delivery has been okay; its just valuation compression has been fierce, and that has more than offset those great gains in earnings, and its pushed stock prices lower."
"I think for a sustainable floor you need fundamentals. Right now if you think about this floor being built under the market – stage 1, we're in right now, people are starting to breathe a little easier, valuations are starting to expand a little bit again, and that's helping lift stock markets.
"But, ultimately to get that follow through you need people to believe that earnings aren't going to collapse, you need the leading indicators to start turning, and that might take, you know, backing off by central bankers, a little fiscal stimulus out of China and Japan, and some resolution of some of the uncertainty around trade and Brexit."
Zyblock adds, "Right now, trade and Brexit and the U.S. shutdown are weighing on business activity and sentiment; companies are sitting on their handsm not expanding, not investing like they would otherwise, cause they don't know what they're facing, whether its with trade, or the European Union."
"Businesses need to see some clarity, some resolution; with that you'll unlock sentiment a little bit, and with unlocking sentiment, companies will be more willing to make long term investments, and that should help growth."
