BPA correction has yet to show up in global markets – Bruce Apted

With many economic indicators pointing to a slowdown, most investors are watching emerging earnings trends closely for signs of a slowdown or earnings correction. In Australia we are only starting to see results for the August reporting season and it is too early to generalize, but globally the majority of companies have already published reports. With global earnings largely complete, we can report a very minor drop of -0.5% in earnings guidance for the next 12 months since June 30. Indeed, since the start of this year, we have seen only a very modest decline of -1.1% in earnings forecasts for the next 12 months.

Source: State Street Global Advisors, Factset, as of August 5, 2022. Earnings corrections are defined as corrections of more than 15% of corrections to earnings per share estimates for the next 12 months.

As shown in Figure 1 above, the average wage correction over the past 24 years has been a decline of -27% on average. By historical standards, the current EPS correction is either very small or may have more to play in if economic conditions deteriorate.

Figure 2 below shows the long-term positive trend in EPS since 1998. Earnings have shown a long-term positive trend, growing at an annualized rate of 5.3% per year on average over the past 24 years. Also shown are major earnings corrections that have occurred during past economic downturns.

Source: State Street Global Advisors, Factset, as of August 5, 2022. MSCI World Index earnings per share for the next 12 months from April 1998 to August 2022. Earnings corrections are defined as corrections of more than 15% earnings per share estimates for the next 12 months.

If the economic downturn occurs and we see a corresponding correction in earnings, you can expect very different impacts on different market sectors. Figure 3 below examines the major earnings corrections since 1998 and compares earnings corrections in the defensive and cyclical sectors. The average profits for the whole market were -27% but the correction of the cyclical sectors fell on average by -42% against only -15% for the defensive sectors. It would appear that the defensive sectors are true to their label with less earnings sensitivity to economic downturns.

Source: State Street Global Advisors, Factset, as of August 5, 2022. Earnings corrections are defined as corrections of more than 15% of corrections to earnings per share estimates for the next 12 months. Defensive sectors are healthcare, commodities, utilities and communications. The cyclical sectors are the discretionary, industrials, technology, financials, materials and energy sectors.

By further breaking down the cyclical and defensive classification, we can see even greater contrasts. In Figure 4, the green bars represent the defensive sectors and the red bars the cyclical sectors. The healthcare and consumer staples sectors stand out, correcting only -3% and -7% respectively during recent earnings recessions. In contrast, Financials (-37%), Materials (-57%) and Energy (-65%) have historically seen the largest negative declines as a percentage of earnings forecasts during economic downturns and market corrections. profits. This is particularly relevant for the Australian market, as these sectors make up a large portion of the main benchmark, the S&P/ASX 300 Index, and are widely held.

Source: State Street Global Advisors, Factset, as of August 5, 2022. MSCI Worldwide Earnings Per Share for the next 12 months from April 1998 to August 2022. Earnings corrections are defined as corrections of more than 15% from estimates of earnings per share for the next 12 months.

The essential

With results for the majority of global equities, the earnings season has proven largely resilient so far. If a recession is truly in sight, as many economic indicators suggest, we could well see further declines in earnings over the next few quarters. This is especially true for more cyclical sectors like financials, materials and energy and is particularly relevant for many of the widely held stocks within the S&P/ASX 300 Index.

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