Capital Daily

Earnings unlikely to become a strong support for US equities

Capital Daily
Written by Hubert De Barochez

Corporate earnings in the US probably remained quite poor in Q4, and we doubt that a big rebound in on the cards anytime soon. As such, given our view that valuations will not rise as fast as they did last year either, we do not expect the US stock market to increase much over the next couple of years.

  • According to our estimates, Germany’s annual GDP increased by 0.5% in 2019 (07.00 GMT)
  • We think that UK CPI inflation remained at 1.5% in December (09.30 GMT)
  • The US and China are scheduled to sign “phase-one” trade deal

Key Market Themes

Corporate earnings in the US probably remained quite poor in Q4, and we doubt that a big rebound in on the cards anytime soon. As such, given our view that valuations will not rise as fast as they did last year either, we do not expect the US stock market to increase much over the next couple of years.

Earnings season kicks off today in the US, with big banks among the first to release their results for Q4 2019. Citigroup, JP Morgan and Wells Fargo will report today, followed by Bank of America, Goldman Sachs and Morgan Stanley later this week. As far as financials are concerned, 2019 is shaping up to be a pretty good year. The data available for the first three quarters and consensus expectations for the fourth point to 12-month trailing earnings per share (EPS) growing by nearly 30%. (See Chart 1.) That is despite the Fed cutting rates by a total of 75bp, which is usually believed to hurt bank revenues by compressing their interest margins.

Chart 1: Expected S&P 500 12-Month Trailing EPS Growth (%, S&P/Capital IQ data)

Sources: S&P, Capital Economics

The health care sector was probably the only other where earnings grew by more than 10%. Overall, most data sources point to the EPS of firms in the S&P 500 either growing marginally (see Chart 1 again) or contracting (see Chart 2).

Chart 2: Actual & Expected S&P 500 12-Month Trailing EPS Growth (%, Bloomberg data)

Sources: Bloomberg, Capital Economics

That said, analysts remain optimistic about the outlook. Admittedly, they think that EPS in the financial sector will drop. But they expect strong rebounds almost everywhere else – particularly in the energy, telecommunication services and materials sectors. (See the grey bars in Chart 1.) Overall, analysts forecast EPS to grow by at least 10% annually over the next two years. (See Chart 2 again.)

While we agree with the consensus that earnings will recover a bit this year, we think that they will fall short of expectations of a big rebound. The main reason is that we expect global economic growth to remain fairly weak.

Even if we are right about that, US equities could continue to make strong gains if valuations rise further. However, this is also unlikely in our view. Valuations, as measured by price/earnings ratios, are already quite stretched by past standards. And, unlike last year, we expect the Fed to disappoint expectations for more easing, and therefore that Treasury yields will edge up a bit.

With all that in mind, we think that US equities will continue to rise over the next couple of years, but much more slowly than in 2019. We forecast the S&P 500 to end 2021 at 3,500, which is only about 6% above its current level. (Hubert de Barochez)

Selected Data & Events




CE Forecasts*

Wed 15th


GDP (2019)






CPI (Dec)





*m/m(y/y) unless otherwise stated; p = provisional

Key Data & Events


The 0.1% m/m rise in core consumer prices in December, which left core inflation unchanged at 2.3%, provides further evidence that underlying price pressures remain subdued. With wage growth also moderating in recent months, there will be little pressure on the Fed to raise interest rates even as economic growth gradually picks up. We expect the forthcoming producer prices data to reinforce that message.

Meanwhile, the Empire State manufacturing index will probably show that the factory sector is starting to improve. Otherwise, the US Treasury Department dropped its designation of China as a currency manipulator ahead of the signing of the “phase-one” trade deal, due to take place at the White House on Wednesday. There are still few details on what the deal will actually include, beyond the fact thatChina appears to have agreed to increase its purchases of US agricultural products, manufactured goods, energy and services by close to $200bn over two years. (Andrew Hunter)


We think that preliminary data will show that Germany’s annual GDP increased by 0.5% last year, down from 1.5% in 2018. Meanwhile, industrial production for the euro-zone is likely to have edged up in November, but surveys suggest that the industrial sector is not out of the woods yet.

Otherwise, Sweden’s CPI inflation probably remained subdued in December. We expect the Riksbank’s CPIF measure to remain below target for the foreseeable future, forcing the Bank to ease policy again this year.

Wednesday also marks five years from Switzerland’s “Frankenshock”, when the SNB dropped the franc’s peg to the euro. We think that it is more likely than not that the Bank will reintroduce another currency ceiling or even some form of capital control in the 2020s.

Finally, the UK government ruled out a second Scottish referendum, which helped the pound regain a bit of ground on Tuesday. On the data front, we think that CPI inflation remained at 1.5% in December. (Melanie Debono & Thomas Pugh)

Other Developed Markets

In Japan, the small improvement in the Economy Watchers Survey in December suggests household spending was slow to recover from October’s sales tax hike. (Tom Learmouth)


Headline trade growth surged in December. But this was mainly a reflection of base and price effects. Admittedly, exports rose in m/m seasonally-adjusted terms, consistent with a pick-up in external demand. But the small improvement in import growth was the result of higher prices rather than stronger volumes, suggesting domestic demand remains subdued. Looking ahead, while the outlook for exports is improving, the headwinds to domestic demand will remain in place. (Sheana Yue)

Other Emerging Markets

Turkey’s industrial production and retail sales figures for November were a mixed bag but, on balance, suggest that the economy gathered pace in Q4. Elsewhere, data showed that inflation climbed to 4.0% y/y in both Hungary and Romania in December. That said, central banks in both countries seem inclined to tolerate above-target inflation, at least for a while. (Edward Glossop)

Published at 15.43 GMT 14th January 2020.

Editor: John Higgins (+44 20 7811 3912)

Enquiries: William Ellis (+44 20 7808 4068)