Global Expansion Runs out of Steam? Investors Keep an Eye on Corporate Earnings

By Joyce Yu

Philadelphia, PA–Global stocks rally on Tuesday after the Chinese President Xi Jinping said in a speech that the Chinese government plans to “gradually and properly” reduce tariffs on imported vehicles as part of efforts to further open up China’s economy. Equities in Hong Kong and mainland China led gains in the Asia-Pacific region and three major U.S. indexes rose more than 1%. However, some economies still flag up concerns about a possible slowdown in global economic growth.

“President Xi tried to defuse trade tension by promising more market access to foreign investors,” UniCredit SpA analysts including Chiara Silvestre wrote in a note. “Today, the macro calendar is rather light, so the global risk mood will be the major driver.”

“Last year it became apparent that global growth was accelerating, but there are now reasons to believe that the acceleration phase is over,” Larry Hatheway, chief economist at Gam, an asset manager, told the Financial Times. “It might not be decelerating yet, but markets trade on inflection points.”

Several institutional indicators also point to the same direction. Citi’s global Economic Surprise Index which measures how often data come in above or below expectations is now back in negative territory. Goldman Sachs’s global “current activity indicator” also weakened notably in March, and a record 74% of fund managers polled by Bank of America last month said that the global economy was now in its “late cycle”.

Echoing the same point of view, Andrew Kenningham, chief global economist at Capital Economics, wrote in a note to clients last week that this could be the peak for the global expansion. He estimated that international growth actually accelerated to 3.5% in the first quarter, up from a 3.2% annualised rate in the fourth quarter.  “The weakness of some recent economic data and business surveys has raised concerns that the global expansion is running out of steam,” he said.

In terms of investment in stocks, analysts seem to be more optimistic. Robert Buckland, chief global equity strategist at Citi, thinks investors should still “buy the dips”, even if those dips will get bigger as the global economic cycle enters its final stage. JPMorgan, agrees that global equities now look oversold, and predicts that the upcoming corporate earnings season would help clear some of investor’s concerns.

With high expectation on the upcoming earning seasons, it will be even more important to see strong earnings figures to prove that the economy remains healthy. Global earnings are forecast to have grown 14.6% in the first quarter, and tax reform has lifted estimates of the S&P 500’s earnings growth to 17%, which would be the fastest quarterly growth since 2011.