“Misguided” investors are ignoring the warning signs of an impending global slowdown, Société Générale has warned.
Analysts at the French bank said falling earnings growth from companies around the world was a forewarning of a possible economic slump.
And while global equity markets have been achieving record highs this year, experts have cautioned that a correction might be imminent.
Analysis of US company results announcements by Société Générale found that the past month’s round of earnings downgrades was “the worst since the 2009 financial crisis”.
The predicted earnings per share (EPS) estimates for US companies from brokers have slumped for the past six months, to an extent that the bank said had historically indicated a US recession was imminent. It used data comparing EPS growth with GDP growth dating back to the 1980s.
Société Générale said most market participants had dismissed the slump in earnings as a simple consequence of the low price of oil hitting energy firms and the stronger dollar weighing on overseas profitability.
But in its global earnings estimates analysis, analysts at the bank said the “counter-evidence is certainly mounting up”.
The report asked: “If global economic acceleration was on the cards, why have 20 central banks cut interest rates already in 2015?
“Why have the economic surprise indicators fallen away, and why are most other countries –with the exception of Singapore, Ireland and Japan – also seeing major earnings downgrades – surely they should benefit from higher US dollar translation effects?”
Company earnings downgrades had afflicted not just the US, with Société Générale’s analysis finding that 4.8 per cent had been cut from this year’s estimates for global earnings, along with a 6.6 per cent decrease in 2016 forecasts.
“The message from within the equity market, and indeed from the strong performance of the sovereign bond market, is that investors are positioning themselves for an economic slowdown,” the analysts added.
Investors who had dismissed this trend as simply a function of the low price of oil and low inflation were “misguided”, the company said.
Investors appeared to have ignored any negative headwinds so far this year, pushing the US S&P 500 and German Dax indices to record highs. This was followed by the FTSE 100 index, which surpassed its previous high recorded on the penultimate day of the past millennium.
All this meant the FTSE All-World index pushed on to record highs last week.
But Tom Becket, chief investment officer of wealth manager Psigma Investment Management, slashed his equity holdings recently because he also thought the signs were pointing to an impending correction.
He said: “Sentiment data, such as hedge-fund positioning, hints at short-term over-exuberance. With the latest corporate reporting season patchy, rather than strong, we feel that a pause for breath is justified.”
“Equity markets have generally pre-positioned for an earnings recovery that we feel will be hard to achieve in the US, where earnings are likely to disappoint this year.”
