Global stocks have been rallying despite myriad geopolitical risks — Brexit, another terror attack in France in mid-July, and the attempted coup in Turkey a day later — that might have depressed stocks earlier this year or last year, according to Jeffrey Kleintop, senior vice president and chief global investment strategist for Charles Schwab. He wrote in his latest market commentary that the reason for this surprising turn is that earning expectations are increasing again.
“Analysts seem to be catching up with surprisingly solid global economic data,” he wrote. Economic data for the Group of 10 (G10) countries, which includes the United States, Canada, Japan, United Kingdom, Germany, France, Italy, Belgium, the Netherlands, Sweden and Switzerland, is exceeding economists’ expectations and “stock analysts’ have been forced to raise their earnings estimates.”
Kleintop noted that the upturn that began in March covers multiple countries and multiple sectors. “Earnings expectations for stocks in the industrials, energy, materials, consumer staples and information technology sectors have joined the health care, utilities and telecom sectors of the MSCI World Index with an improving outlook since February,” he wrote. The consumer discretionary sector, while not improving, isn’t declining either; the only declining sector is financials. ”Perhaps if interest rates halted their decline it may help to reverse the [earnings per share] revision trends in the financials sector,” he wrote.
The Brexit vote wasn’t enough to depress stocks, even in Europe, according to Kleintop. In fact, the International Monetary Fund updated its forecast following the vote by “shaving 0.1% off of global growth for both 2016 and 2017.” Kleintop expects global growth to reach the 3.1% rate seen in 2015, followed by a “modest acceleration” to 3.4% next year.
“While the global growth outlook is relatively stable, it remains below-average and vulnerable to shocks. Without stronger global economic growth, earnings may stabilize but are unlikely to post a powerful rebound,” he wrote.
Kleintop added that the “so-called ‘fear gauges,’ or stock market volatility indexes, for the United States (VIX) and Europe (VSTOXX) are in line with some of the lowest levels of the past year and a half. However, if earnings estimates should roll back over due to a shock or deterioration in the global economic data, stocks are unlikely to be as resilient to geopolitical developments.”
— Read Exploring Volatility With the Inventor of the VIX on ThinkAdvisor.