Diverging Trends: A Look At Earnings Growth Around The World

Diverging Trends: A Look At Earnings Growth Around The World

Key takeaways

  • In 2019, stocks have been rising while earnings growth estimates and bond yields have been falling. 

  • The earnings growth outlook across countries has faded the most where it was strongest in 2018, leading to a convergence of growth rates for 2019.

  • The divergence in the assessment of the outlook reflected in the stock and bond markets may be decided by the ongoing convergence in earnings growth expectations across regions.

As stocks have posted solid gains so far in 2019, analysts’ earnings per share estimates have been falling. That isn’t unusual, as analysts are often too optimistic at the start of the year. But, the pace of the decline in estimates has been eye-catching, as you can see in the chart below.

Analysts’ expected earnings per share for global companies in 2019 has been falling sharply

MSCI World Index EPS estimates

Source: Charles Schwab, MSCI data via Factset as of 2/15/2019.

The earnings growth outlook has faded the most where it had been strongest last year. The chart below shows how the countries and regions with the fastest earnings growth in 2018 are seeing the largest expected slowdown in growth in 2019 (such as the United States and United Kingdom), while some of last years’ slower growers are expected to see higher expected growth (primarily Europe).

Earnings growth estimates have come down the most where they had been strongest

EPS and Earnings growth scatter graph

Source: Charles Schwab, MSCI data via Factset as of 2/15/2019. All growth rates measured using MSCI indexes in US dollars. Canada = MSCI Canada Index, Emerging Markets = MSCI Emerging Markets Index, Japan = MSCI Japan Index, Europe ex-UK = MSCI Europe ex-UK Index, EAFE = MSCI EAFE Index, World = MSCI World Index, United States = MSCI USA Index, United Kingdom = MSCI United Kingdom Index.

The result of these changes is that earnings growth estimates for 2019 have converged across regions to a relatively low and narrow range of 2% to 9%, from a range of -2% to 22% in 2018, as you can see in the chart below.

Earnings growth estimates have converged across regions to single-digits

2018 and 2019 EPS estimates

Source: Charles Schwab, MSCI data via Factset as of 2/15/2019. All growth rates measured using MSCI indexes in US dollars. Canada = MSCI Canada Index, Emerging Markets = MSCI Emerging Markets Index, Japan = MSCI Japan Index, Europe ex-UK = MSCI Europe ex-UK Index, EAFE = MSCI EAFE Index, World = MSCI World Index, United States = MSCI USA Index, United Kingdom = MSCI United Kingdom Index.

So far, stock markets around the world seem unconcerned about the downtrend in the growth outlook, behaving as if the trend may quickly abate or even turn around. After tumbling in the fourth quarter, the markets across countries and regions have all posted gains year-to-date, as you can see in the chart below. Even countries with high profile risks, such as United Kingdom and Italy, have posted solid gains this year.

Stock markets around the world have rebounded in 2019

World Indexes

Source: Charles Schwab, Bloomberg data as of 2/15/2019. Past performance is no guarantee of future results. All indexes normalized to 0% as of January 1, 2019.

The bond market seems more concerned about the economic growth outlook than the stock market this year. The narrow gap between short and long-term Treasury yields, often referred to as the yield curve, reflects a downbeat outlook for future growth in the bond market. After moving in sync last year, global stocks have rebounded while the U.S. Treasury yield curve has not. This divergence in the two markets can be seen in the chart below. 

Stocks and bonds reflecting different growth outlooks in 2019

10-yr Treasury vs MSCI World Index

Source: Charles Schwab, Bloomberg data as of 2/15/2019. Past performance is no guarantee of future results.

Internationally, the decline in government bond yields is even more extreme in places like Japan and Germany where yields are back below zero or near it again, reflecting a pessimistic outlook. Japan’s 10 year government bond yield is negative again at -0.03% and the 10 year German bond yield is down to 0.10%, as you can see in the chart below.

German and Japanese bond yields

German 10-year vs Japan 10-year

Source: Charles Schwab, Bloomberg data as of 2/15/2019. Past performance is no guarantee of future results.

Global stock prices have rallied this year, a sign that stock market investors anticipate growth. Yet, bond prices have rallied also, pushing down yields, a sign that bond market participants are bracing for weakness. This divergence in the assessment of the outlook may be decided by the ongoing convergence in earnings growth expectations across regions. If expectations continue to slide into negative territory, stocks could begin to follow earnings estimates and bond yields lower.

About the author

Jeffrey Kleintop

CFA, Senior Vice President, Chief Global Investment Strategist