27 August 2010 at 7:54 GMT
Within our macroeconomic scenario (See the full detail here) equities should decline and the reason is quite simple. Long-term there should be a relationship between the growth in GDP and growth in earnings and with GDP significantly revised lower equity markets will also have to revise their earnings growth expectations down.
However, the relationship is not linear because earnings depend on two factors (at least); sales and margins – sales are going to be sluggish going into 2011, while there is still upside for margin improvement, but a lot less than expected. Consequently earnings growth expectations has to be revised lower than the current 89$/share in S&P500 to around 82-84$/share. This will bring equity prices lower.
Shorter-term markets are still moving downwards and we expect European equity markets to open 0.2% lower today. However be aware that the slightest positive news hitting the market could set off a rally as markets just begs for positive news. Volatility will remain high.