What are the earnings estimates for the year ahead?
Reflecting on the past month, Jeremy Richardson explores:
- Real interest rates
- 2024 earning estimates
- Valuations
Watch time: 42 minutes 23 seconds
View transcript
Hello, this is Jeremy Richardson from the RBC Global Equity team here with another update. And before we get into things, I just want to give you one number – 19%. I'll come back to that at the end. Three things I want to share with you about what's been going on in the last month or so.
The first of which is that real interest rates, which have been driving the market, at least market sentiment, have actually rolled over a little bit this month. We've lost about 25 basis points in terms of real interest. That might not sound like a lot, but the trend, as they say in markets, is often your friend and lower real interest rates actually provide some relief for investors in terms of valuations.
The second thing that we've been seeing is that earnings estimates have been coming in now for next year, 2024 – and 2025. And just taking a look at those earnings estimates, they’re not too bad. US consensus earnings are for an increase in the region of 10 to 11% for both of those two years ahead. Europe, on the other hand, is a little bit lower, 3 to 5%, reflecting I think, the weaker economic development, but that double-digit rate of earnings growth coming out of US corporates isn't too bad. It compares favourably with prior years. I think the interesting thing about that, by the way, is that it is a positive and upward number showing that the market consensus that we're going to have at least maybe a soft landing, perhaps avoid the worst excesses of a hard landing, a recession, seems to be factored into the market's outlook.
And the third thing is around valuations. Now, although the US is forecast to deliver much stronger earnings growth, you are being asked, as investors, to pay a bit extra for that. In fact, quite considerably more, about six points more in terms of the P/E multiple compared to what you've been asked to pay for Europe today. So, you might think, well, look, that's where the value is, Europe is cheaper, but of course you've got lower earnings growth. And of course, even within the US, we come back to that trend that we've been talking about previously – about how skewed performance has been in the US market. There's been a lot of focus on the phrase you might have heard the ‘Magnificent Seven’. Those large technology companies still seem to be making the weather in terms of the US market, and their stocks are collectively dragging up the P/E multiple of the US market.
If you look through those to everything else, then those multiples are lot closer to what you're seeing in Europe. So, there does appear to be value out there in the market, particularly if those real rates are beginning to fall and we get those earnings estimates coming through. So that's not necessarily a bad outlook, I would say, for the year ahead.
The challenge, though, is that in order to realize that potential, it may be we need to see some sort of evolution in the market leadership. Up until now, it has been driven by those ‘Magnificent Seven’. But thinking about where the relative value is in the market, there is a lot of other value elsewhere and it is interesting to see, more recently, that we're beginning to see the market begin to rotate into certain of those other ‘non-Magnificent Seven’ companies. That's an interesting dynamic worth paying attention to.
And that's where I come back to that 19%, because up until the end of October, only 19% of companies in the MSCI world benchmark have outperformed. That's not a lot. Less than half of what it’s ordinarily been over the last several years. It makes it very difficult, as an active stock picker, to pick companies that outperform, if there are just fewer of those. You might think that's a terrible number, in fact, 19%. But compared to what it was the prior year, just 9%, it actually indicates that things might be getting a little bit better. If we get a rotation in the market, driven by the search for relative value, that may mean that we find that there are more stocks that outperform and that they improve conditions even more for active stock pickers.
I hope that's been of interest and I look forward to catching up with you again soon.
