As we near the end of 2019, investment professionals will be preparing their expectations for 2020. A key determinant at stake for equity markets is earnings per share (EPS) growth. It is industry practice to discuss earnings per share for specific corporations or the equity market at large. The scope differs for both, in that, EPS growth expectations for companies will determine equity returns for specific companies, whilst the aggregate market EPS growth expectations impacts the overall equity asset class.
Modern finance literature instilled in investors and company executives alike, a culture that economic growth is fuelled by corporate earnings growth. As such, investors expect (as a minimum) growth on a yearly basis in profitability for companies. Those that fail to achieve EPS growth will be sold off by investors resulting (mostly) in negative equity returns for the company. Differences emerge in industries where the magnitude in growth differs significantly. Intuitively, investors should expect stable growth from companies that are at a mature stage and operate in stable industries, like the food and beverage industry. On the other hand, when the company is in its growth stage and operates in growing industries (technology for example) investors would be expecting significant growth.
What are market expectations for EPS growth in Europe for the next 12 months?
Investors can use the population of companies within the Euro Stoxx index to understand EPS growth expectation for the next twelve months. Crunching the numbers, market expectations for EPS growth in Europe stands in the double digits of 28 per cent. This is a remarkable number given the gloomy macro-economic climate in the Euro Area. Over the past month, forward expectations on EPS growth shrank marginally by two per cent as incoming economic data in the euro area disappointed. Nonetheless, the expected earnings growth in Europe provides a glimmer of hope for European equities going into 2020, at least on a fundamental basis.
How do European company EPS growth expectations compare to US counterparts for the next 12 months?
The backdrop is that the US has undergone superlative economic growth when compared to the European region in the last few years. This means that companies serving the US market have been operating in a favourable business environment. As a result, investors have to be cognisant of the fact that US companies EPS figures come from a higher EPS base. Nonetheless, market expectations for EPS growth in companies forming part of the S&P 500 index currently stand at a respectable 14 per cent with no significant downward revision in the last month.
Investors need to be mindful about market expectations on EPS growth as this will be the benchmark upon which markets will assess companies across both regions. Taking cue from the two core regional EPS growth expectations, investors are upbeat and positive on EPS growth numbers which augurs well for 2020 corporate profitability.
This article was issued by Jesmar Halliday, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.