Equities paused for breath on Tuesday, however they remained fairly resilient despite disappointing import export data from China. Chinese imports fell 20% from this time last year in US dollar terms and exports fell by 3.7%.
Despite the recovery in equity prices over the past couple of weeks the bears still appear to have the upper hand. Goldman Sachs lowered their forecasts for 2016 earnings per share to $120 for the S&P 500. If you take an average historical multiple for the S&P 500 of 15x that would take fair value for the S&P 500 index back to 1800, roughly 10% lower than currently trading.
Concerns over global growth have ensured that defensives continue to outperform cyclical stocks. Merrill Lynch analysis suggests by something in the region of 30% in the past year. They point to a weakening of earnings revisions, industrial and consumer confidence and a rise in high yield to remain cautious on equities, and for a portfolio to remain positioned towards defensive names. Their latest fund manager survey suggests fund managers do remain cautious, but did increased weightings in equities from a three-year low recorded in the last survey. Allocation to bonds is now at a 29 months high. Weighting to the resource sector increased but remains below historic averages. It would appear a steeping in the yield curve leading to cyclical rally would catch most fund managers of guard.
UK inflation fell back into negative territory on Tuesday, lower petrol prices and falling clothes prices mainly to blame. Yields on UK gilts hardly moved on the report, having probably already anticipated the number. Germany likewise sees no sign of inflationary pressures within their economy as year on year inflation also remained at zero. Tuesday also saw the release of the latest German ZEW survey, reflecting the views of analysts on the sentiment towards current economic conditions. Sentiment has fallen to lows last seen in October last year. We did write at the time that equities tend to bounce when sentiment is low, and that proved to be the case last October as equities rallied into the year-end from the lows.
Earnings will now take centre stage; earlier on Tuesday Johnson and Johnson reported earnings that beat analyst expectations but fell sort on revenue due to the stronger dollar. Johnson and Johnson appear to demonstrate that despite a weaker than expected revenue number they continue to be able to gain efficiencies to maintain margins and therefore meet earnings forecasts. After hours on Tuesday Intel and JP Morgan reported earnings, the technology company managed to beat estimates, JP Morgan on the other hand missed. Intel and Johnson and Johnson maintained their current outlook for 2015.
One final point of note, Barclays Bank announced the appointment of a new CEO on Tuesday. We have made the point in the past that banks are no longer run by traditional bankers. Barclays seemed to reinforce this view on as the incoming Chief Executive is a former Chief Executive of JP Morgan Investment bank, he replaces Mr Jenkins a retail banker.