Stock prices tend to be dictated by two components over time: (1) the trend of corporate earnings; and (2) the valuation the market is collectively willing to assign to those earnings. Of those two, we believe corporate earnings trends hold the key to Europe’s stock performance in 2016. We believe the eurozone is in the early innings of a positive earnings cycle. For instance, few have noted that 2015 marked the first year in quite a while in which eurozone large-cap companies out-earned their US peers – a trend likely to continue in 2016, in our opinion. This positive cycle comes after a lengthy and pronounced drought (by our calculations, European earnings are still roughly 30% below their 2007 peak) and should be aided by an accommodative European Central Bank (ECB), a relatively weak euro, and low energy input costs. Unfortunately, these tailwinds are largely absent in the UK, where earnings are likely to remain disappointing.
Here is The Weekly View.
UK earnings have been dragged down, on average, by large crude oil and mining companies listed in the FTSE 100 Index. European earnings have been improving, following a long period of underperformance, thanks to a competitive euro and the European Central Bank’s Quantitative Easing.
Note the Chart of the Week in The Weekly View which shows earnings trends since 2008 for the US, Eurozone, UK and Japan. Earnings for one of these countries is significantly outperforming, and it may surprise you.Back to top