Risk assets appear to be taking an optimistic view of the world. Most markets have recovered the declines seen late in 2018.
At the same time, earnings have stagnated in most geographies. As a result, valuations, on a forward price-to-earnings basis, are considerably less supportive than they were as we entered 2019, and credit spreads considerably tighter (see below).
Equity and credit market valuations
Global forward price-to-earnings ratios Fixed income spreads
x, multiple % option-adjusted spread
Is earnings growth likely to reaccelerate in 2020? We struggle to see it. Our overall assessment is that corporate earnings will hold up in 2020 in most major regions, but we shouldn’t expect too much growth. A key global problem is that tight labour markets are pushing up wage costs, but companies still have little top-line growth as pricing power remains elusive in most industries. As a result, margins are under pressure (see below).
S&P 500 earnings per share growth breakdown
% change year on year, EPS estimates over next 12 months
The risks to this outlook for earnings appear broadly balanced. A re-escalation in trade tensions or margin pressures may lead firms to cut jobs, and the global economy could take a turn for the worse. But we are also mindful that the higher wages that have been squeezing profits in 2019 could in turn lead to higher sales. Declining interest rates may also help ease margin pressures and boost sales. This prevents us from getting overly bearish.