CHART OF THE WEEK
Q3 2016 company earnings reporting is in full swing and for the moment, the news is encouraging. Bloomberg reports that of the 172 Euro Stoxx companies having already published their earnings (that is just over half of the companies) there are no less than 99 positive surprises (58%).
These positive releases have revised 2016 consensus earnings upwards by +1.3% over the past month according to Factset, marking a significant turning point: following a slump in the first half of the year, 2016 annual forecasts then stabilised until mid-October. The stabilisation had nonetheless resulted in a rise in estimated 12-month earnings, as they are a moving average over 2016 and 2017, and the weight of 2017 increases through time.
Having previously been revised downwards by 7.3% to 0.0%, the 2016 earnings growth forecast has recovered to 1.3%. Although the expected growth rate for 2017 has been downwardly revised to +12.3%, this is due to slightly more cautious revisions for 2017 (+0.6% in the last month).
OUR ANALYSIS
This upward revision in earnings forecasts is set to continue for several reasons:
- Firstly, the overall economic backdrop is still gradually improving;
- Secondly, the euro’s fall (to 1.06 against the dollar, down -4.9% from its average third-quarter level) will boost overseas earnings;
- Thirdly, the rise in long-term rates will have a very positive effect on earnings in the financial sector.
We are therefore likely to see double-digit earnings growth for Eurozone companies next year, which should buoy the market against a backdrop of ongoing recovery (forward P/E ratio of 13.2x).
The opinion expressed above is dated November 21st, 2016 and is liable to change.
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