Market Update – Feb 2020
An acceleration in growth was priced into equity markets in the first half of 2019, with economic acceleration expected first in H2 2019. When this acceleration didn’t materialise, it was pushed out to Q1 2020. It appears to us that these growth acceleration hopes are likely to be pushed out again due to the coronavirus.
With that consensus expectation for a rapid and sustained improvement in economic growth comes the consensus outlook for a rapid rebound in earnings. Earnings growth of approximately 10% is expected for 2020, and looks too optimistic. In the current earnings season, ex some market-exposed financials and technology, results for industrials and cyclicals have been mixed at best with outlooks that can be described as hopeful with second-half-weighted recoveries. In absolute terms, earnings have declined over the last year, leaving the entire gain in equities since end 2018 down to multiple expansion.
As noted above, one of the key drivers in our view of the most recent move higher in equities was the provision of liquidity by the Federal Reserve. Whilst the Federal Reserve is likely to keep its balance sheet large, reliance on repo is likely to fade, the balance sheet will not expand continuously, yet equity markets appear to have priced an ever-expanding balance sheet.