April 5, 2020

Slashing earnings estimates significantly down

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In Short

China’s official NBS PMIs bounced back in March. The manufacturing PMI rose to 52.0, up from 35.7, while the non-manufacturing increased to 52.3 after 29.6 in February.
Slashing earnings estimates significantly down
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Highlights:

  • We significantly cut our estimates for the US and EA and are currently 27% and 28% below the IBES consensus for the corresponding markets.
  • Risk premia are near Lehman times but earnings dispersion is still worrying and both economic and earnings consensus forecasts have more room for further downside.
  • Usually, after deep drops in earnings the first year of recovery sees huge earnings upside, above 30%. We are more conservative and use 20%.
  • On a 12-month horizon, even using as input -38% and -30% earnings cut from peak (euro area and US resp.), we see the chance to realize double digit total returns, which encourage us to adopt a limited overweight on equities.
  • Risks: postponed contagion peak and cities’ lockdown with further negative impact to the economy and earnings forecasts.

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SLASHING EARNINGS ESTIMATES SIGNIFICANTLY DOWN

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