It’s clearly been a great start to 2019 in equity markets, due mainly to the stunning policy backflip by the US Federal Reserve, combined with the fact that equity markets ended 2018 so poorly. Low share prices, high short interest levels and unexpected central bank policy support are a very positive short-term combination, as we have seen.
However, in amongst all the positive share price action in January and early February, it is worth noting that consensus global earnings estimates for 2019 are falling. In effect, investors are paying higher prospective P/E’s for lower consensus earnings estimates.
The chart below overlays the MSCI World Equity Index and the Citigroup Global Earnings Revision Index. It shows analyst profit downgrades continue to exceed upgrades. This potentially suggests the relief rally/short-covering rally we have seen to start 2019 potentially lacks fundamental earnings support.