8 May 2023 “Objects in the mirror are not as bad as you thought they were” After several sub-par quarters and a period of aggressive estimate cuts, Q1 earnings reports have broadly beaten the reduced earnings forecasts. This has triggered not just higher stock prices but a broad and rapid upturn in the pattern of […]
15 April 2023 We recently launched a new report designed to guide our institutional clients during earnings seasons. It is based around an “Earnings Screen Score” ranking methodology that draws on selected inputs from our long-standing MAER stock database to identify companies which have strong near-term fundamental momentum going into an earnings report. Our research […]
15 January 2023 Some of the common questions among fund managers who are looking at Mill Street’s stock selection and asset allocation tools are on the topic of whether using analyst estimate revisions metrics for stock return forecasting is useful: “Do analyst estimates really matter for stocks nowadays? “ “Aren’t equity analysts always conflicted, and […]
A question we have heard several times from clients has been: when will equity analysts get as bearish as investors have been recently? Well, analysts may be getting closer to that point now, particularly for the large-cap US stocks that dominate the cap-weighted indices.
China’s stock market (based on the MSCI China Index, which includes local Chinese listings and listings in Hong Kong) has lagged badly, whether compared to rest of the Emerging Market universe or to the developed market universe. The underperformance began in early 2021 and mostly continued since then, with a short rebound earlier this year that has since been reversed.
And the underperformance relative to developed markets (based on the MSCI World index) in US dollar terms (reflected in the US-listed ETFs that track the indices) has been quite dramatic. Since the interim peak in relative performance in mid-February 2021, the MSCI China ETF (MCHI) has returned -49%, while the MSCI World Index (ticker URTH) has returned -4%, a 45% underperformance in about 18 months.
Tracking analyst earnings estimate revisions activity (i.e., are estimates rising or falling, and by how much?) is a key feature of our research. With earnings season underway, we can check in on how revisions activity looks across the 11 US sectors, where we find, among other things, a big divergence between the commodity-related sectors of Energy and Materials.
After nearly a decade of US equities mostly outperforming those in Europe, our indicators are finally more decisively aligned in favor of Europe now.
Fundamental momentum has shifted to Europe now
All of the indicators in the chart below are based on bottom-up aggregations of the constituents of the iShares Core MSCI Europe ETF (ticker IEUR) and the SPDR S&P 500 Trust (ticker SPY). The middle section of the chart shows our key metrics of “fundamental momentum” for Europe relative to the US.
The level and growth rate of corporate earnings remain reasonably good – earnings are at record highs, and are expected to grow about 10% this year and next. However, analysts are no longer revising their earnings forecasts higher on average, halting a trend that has generally been in place since mid-2020.
The table below shows the current consensus earnings per share estimates for the S&P 500 index (based on the bottom-up aggregation of individual company estimates). While estimates are slightly higher than they were three months ago, in the last month there has been essentially no change in either this year or next year’s estimate.
As Q1 earnings season gets under way, below we review the current consensus estimates for the US (S&P 500) and Europe (Stoxx 600).
The table below shows the current bottom-up consensus estimates for the S&P 500 for Q1, Q2, and Q3 of this year.
It also shows the percentage change in each quarterly estimate from one month ago, and the expected percent growth in earnings from the year-ago quarter.
Our indicators of analyst earnings estimates revisions in the US highlight a key theme: revisions for large-cap (and mid-cap) stocks have held up much better recently than those of small-cap stocks.
While the proportion of analysts raising their earnings estimates relative to those cutting estimates has been declining ever since its extremely high peak in the middle of last year, the difference between large-cap and small-cap revisions has favored large-caps, and has shifted further in favor of large-caps most recently.