If you are seeking an earnings lift, look away now

Market strategists say recent bounces are unlikely to last

LONDON: This time it’s different. That might be the motto of some investors recalling last October’s painful sell-off.

As European equities struggle to reach new peaks, more than hope is needed for the market to go higher. Better earnings would help and thankfully, the reporting season is fast approaching. But real improvement is far from certain.

The trouble is, global revisions to profit estimates have been consistently negative for the past six months.

And if you omit a tiny positive print in April, they’ve actually been downgraded for about 14 months now.

Strategists including Oddo BHF’S Sylvain Goyon are struggling to be optimistic about the market’s prospects without an improvement in earnings per share. Consensus EPS growth forecasts for the Stoxx 600 are still standing at 9.2% for 2020, so further downwards revisions are inevitable, he says. Goyon’s own forecast is for just 2% growth next year.

That’s why recent market bounces are unlikely to last, Goyon says. He’s doubtful of a swift resolution in the trade war and sees hopes for fiscal stimulus as “wishful thinking.”

Barclays’ strategist Emmanuel Cau is on the same page in seeing a need for EPS revisions to bottom out, skeptical of an immediate upside.

He argues that more is needed to see a breakout from the current range, which is similar to the pre-jump market movement seen in late 2016.

As for the one-year outperformance of bonds against equities, it’s unlikely to reverse unless the macro backdrop improves. That may be some way off. Citi’s data show economic surprises have soared to their highest level since April, 2018 in the US this week, while they went back to the doldrums in Europe.

During the latest market bounce, equities finally recorded inflows, although very little for European stocks and some positioning trends don’t look bullish.

Systematic trend-followers (CTAS) were forced to cover shorts on major European equity futures and flipped to the long side, according to Nomura Cross-asset Quantitative Strategist Masanari Takada, who remains doubtful that the trend has legs.

Takada says CTAS’ net exposure is strongly correlated to economic momentum like German Ifo and economic surprises, while hedge funds tend to add longs on European stocks when inflation expectations rise. None of this data is positive at the moment.

Technically, the Stoxx 600 has failed to break out of its cap of around 392.4 points and sold off on the five occasions it was tested. LCM technical analyst Andy Dodd says the index formed a bearish reversal pattern after the last breakout attempt.

In the meantime, Euro Stoxx 50 futures are up 0.1% ahead of the European open, while S&P 500 contracts are down 0.2%.

> Sectors in focus:

Watch Henkel after US adhesives maker HB Fuller tumbled in extended trading following a cut to its earnings guidance. Also watch for read-across into firms like Covestro and Sika, which are also involved in making sealants and adhesives.

Watch trade-sensitive sectors as the US is set to get World Trade Organisation authorisation to impose tariffs on about Us$8bil worth of European goods in reaction to state aid given to airplane maker Airbus.

That’s in opposition to the European Union imposing Us$4bil worth of tariffs on US exports in a clear tit-for-tat move more in line with the aggressive stance the Trump administration has taken.

Watch the pound and UK stocks as Prime Minister Boris Johnson remains defiant in the face of calls to resign and will once again push for a new general election. Now attention turns back to how lawmakers can definitively prevent a no-deal Brexit.

> Comment:

“We see attractive value in the UK utilities, especially among networks and retail,” Citi analysts write in a note.

“With the political and regulatory risks diminishing, we believe these value traps will turn into value trades.”

Citi says it’s turning more bullish on UK utilities, noting polls suggest the likelihood of a majority Labour Government led by Jeremy Corbyn is reducing, which means the nationalisation risk is easing; upgrades Centrica, United Utilities and Pennon to buy from neutral.

Thomas Cook’s collapse gives On the Beach an opportunity to make a “step-change” in its market share and deliver as much of 5 years of growth in 12 months, Berenberg says in a note maintaining buy on the online travel firm. Engie is resumed with a buy-rating at Citi, which says co should be relatively immune to a potential economic slowdown as about 90% of Ebitda is regulated or contracted. —