by Jeffrey Kleintop, Chief Global Market Strategist, Charles Schwab & Company
Business sentiment shows continuing decline; earnings estimates reflect robust growth. Can we expect more optimism post-election, despite policy uncertainties?
Earnings reporting season seeing fewer than usual upward revisions to future quarters
Source: Charles Schwab, FactSet data as of 11/1/2024.
Earnings growth estimates based on consensus analysts' expectations. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Wall Street analysts' earnings estimates tend to follow the trend in the global PMI with a lag of about 3 months, as you can see in the chart below. When the PMI is rising above 50 analysts revise up their growth outlook, when the PMI is falling below 50 they tend to cut their estimates to account for losses. The October reading of the global manufacturing PMI was 49.4, the fifth month in a row below 50. Yet, at the same time, Wall Street analysts' estimates are for double-digit earnings growth for global companies over the coming 12 months.
Something's gotta give
Source: Charles Schwab, Macrobond, MSCI, S&P Global, data as of 11/4/2024.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Which one gives? Despite the weaker outlook by business leaders and analysts, we think it is more likely to be the PMI moving up than earnings moving down—but it's possible both may have to give a little.
Why would the PMI be poised to rebound back above 50 in the coming months? One reason is the central bank rate cutting cycle is now well underway. Historically, there has been a lag of nine months between moves in the net number of central banks cutting rates and the PMI, as you can see in the chart below. The net number of the 18 advanced economy central banks cutting rates has moved up to 10 (the latest move was a cut for 14 while the last move was a hike for four). Historically, this has aligned with a PMI above 50.
Source: Charles Schwab, Macrobond, S&P Global, data as of 10/27/2024.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. The 18 central banks included in the analysis include Australia, Canada, Czech Republic, Denmark, European Union, Hong Kong, Hungary, Iceland, Israel, Japan, New Zealand, Norway, South Korea, Sweden, Switzerland, Taiwan, United Kingdom, United States.
Election uncertainty may have caused some businesses to be cautious, postponing, scaling down, delaying, or even cancelling some growth initiatives. That might lead to a post-election rebound in the PMI as the uncertainty fades. The Japan election last weekend may offer a lesson for investors in this regard. Japanese stocks, represented by the Nikkei 225, posted gains in the four days immediately following last Sunday's election, despite post-election headlines that read:
- "Japan plunged into political uncertainty after voters deliver dramatic defeat to longtime ruling party" – CNN
- "Japan Election: Asia's Most Stable Democracy Is Sent Into Chaos" – The New York Times
- "Japan's Stability Gets a Monster October Surprise" – Bloomberg
We believe the uncertainties brought up in those articles are accurate. However, the immediate post-election reaction in stocks was a move higher with Japanese stocks, represented by the Nikkei 225, posting gains on each of the four trading days that followed the election. More importantly, the Japan PMI preliminary reading released on October 24 came in at 49.0 and the final reading released on November 1 was a slightly higher 49.2, suggesting business sentiment may have seen a slight rise despite the October 27 election uncertainties. As we look to the U.S. election this week, just getting the election behind us may have some positive impact, no matter the policy uncertainty it could bring.
Michelle Gibley, CFA®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.