Home >Markets >Mark To Market >Corporate earnings could pause recovery rally in global equities

While global equities have rallied on the back of aggressive monetary easing by central banks, the corporate results season should hopefully provide a reality check.

“Q2 earnings season starts next week, which will be the most exciting in many years, as 80% of S&P500 companies skipped their guidance in Q1, leaving investors to fly blind into the storm. With US technology stock valuations at record levels, there is little margin for error so any revenue miss could lead to steep declines," Steen Jackobson, chief investment officer of US’s Saxo Bank, said in a note.

The one-year forward price-to-earnings multiple for the MSCI World index is currently at 20.4 times, compared to around 17.6 times when the markets were at their peak in February. The rise in stock markets comes despite the steadily increasing number of covid-19 cases. Evidently, the markets are choosing to focus on the gradual opening up of economies, and expecting contraction in business activities to soften. JP Morgan’s Global Composite Index data released on Monday showed the headline index stood at a five-month high of 47.7 in June. Consequently, confidence among global businesses about future outlook also improved.

The widely-tracked fear gauge, the Chicago Board Options Exchange volatility index (CBOE VIX), has cooled considerably from its peak of over 80 in March. The CBOE VIX is currently at 25. While CBOE options prices may not reflect expectations of volatility ahead, the fact remains that there are various factors that could make markets volatile.

US-China trade tensions and upcoming US elections can also swing the market either way. Also, economists warned against pricing in more easing, as many central banks are now left with limited fire power to provide more stimulus.

“Equity market valuations are a function of forward earnings, typically heavily influenced by the immediate year ahead, through corporate guidance. Beyond that, things get quite fuzzy. And even with prospects for 2020-21 far from certain, equity markets are looking into that fuzziness and are tending to see more positive than negative shadows," said Padhraic Garvey, regional head, research, Americas, ING.

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