Global Earnings Revisions Collapse: When Bad News Is Good News

I’ve seen a few charts floating around on global earnings revisions, and this is certainly something we track. As you might expect, we take a unique angle on this, and the chart in focus today presents a particularly unique indicator on global earnings revisions trends – and what it means for stocks.

Q4 hedge fund letters, conference, scoops etc


3844328 / Pixabay

Today’s chart comes from a report on the outlook for Global Equities, which covered market breadth, valuations, earnings, and sentiment indicators.

Simply, the chart shows a total global collapse in earnings revisions.

Global Earnings Revisions

Onto the detail. What we’ve got here is the breadth of earnings revisions momentum across the 45 countries we monitor. Specifically the proportion of countries whose earnings momentum score (combination of the earnings revisions ratio and short-term percent change in consensus earnings), is positive. So as you can see this indicator dropped to 0% in 2009, and was close to 100% in the boom years.

Basically this indicator tells you how healthy the global corporate earnings picture is… or does it? The indicator is built off of consensus earnings estimates from the Refinitiv I/B/E/S dataset (the gold standard for consensus forward earnings), but where these numbers ultimately come from is the estimates of analysts, and analysts are people… and as all good students of the market know, people are prone to swings in sentiment; often becoming too pessimistic at the trough in the cycle, and too optimistic at the peak of the cycle.

This understanding is important, and a glance at the chart shows how this plays out in practice. Take a look at the other times global earnings momentum breadth collapsed from a high level (e.g. 1998, 2002, 2009, 2012, 2016) – with the exception of 2002 (which was a little early), these were all major market bottoms. Hence my claim in the title that bad news may be good news.

So while a collapse in global earnings revisions momentum may sound like a bad thing, from a contrarian sentiment signal standpoint it could actually turn out to be a key bullish signal for global equities.

I watch markets and macro indicators the world over to create a comprehensive picture designed to help investors make more informed decisions. I am a chart-driven macro analyst who covers global asset allocation and economics. While such research can be complex and time-consuming, I have the time and resources to provide top-flight information for investors. If you want access to institutional-quality research without the institutional price tag, along with weekly actionable ideas, consider a subscription to Weekly Best Idea, my Marketplace service. Weekly Best Idea is a great way to add extra analytical muscle and idea flow to your process, and achieve better investment outcomes. Click here for a free trial!

Article by Top Down Charts

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