Global stocks markets look like ending a dreadful quarter in a downbeat mood. VW and now Glecore adding to the gloom in the past week. Global stocks have lost approximately 10% this year and some developed markets are now down close to 20% from their peak. This correction has meant that the total market capitalisation of global equities has fallen by 10 trillion dollars, as two years of gains have been given up in approximately three months. Only 10% of quarters in the past three decades produced double-digit negative returns according to one broker.
Equity markets are always considered forward looking, and true to form analysts are now adjusting earnings to reflect the weakness in prices. The global earnings revision ratio, according to Merrill Lynch has fallen from 0.785 to 0.62. The Earnings Revision Ratio measures the number of stocks for which the consensus EPS estimate has risen versus the number for which it has fallen. Share prices fall and analysts then react by lowering earnings forecasts.
The focus will now turn to earnings for the third quarter, Alcoa as always starts the season of as they report on the 8th of October. This will be followed hard on the heals by the banking sector. How the earnings season goes will probably go some way to determine the performance of equity markets in the final quarter.
Earnings expectations for the third quarter are for earnings to fall 4.5% years on year for the S&P 500, according to factset. This will be the first time earnings have fallen two quarters in succession since 2009. On a possibly more positive note companies and analysts have lowered q3 earnings estimates for the S&P 500 by a smaller margin than average. The S&P 500 now trades at 15.2x price to earnings multiple, this against an historic average of 15x.
We pointed out the depth of the recent correction in equity markets, and the possibility of an earnings recession. The description given to two quarters of negative earnings growth. Equity markets historically at some stage look to an earnings pickup and a brighter outlook, and equity prices rally. For example the equity market turned in 2009 before analyst’s forecasts. If history has taught anything about stock analysts and markets, the market moves first analysts catch up by then markets are looking to the next cycle. Despite what appears to be a very negative sentiment the quarter end window dressing we discussed at the beginning of the week did not materialise.