Spectacular fall in long-run corporate earnings growth
- 10-year annualised corporate earnings growth fallen to lowest since 2005
- Real profit growth has been 1.6% negative in real terms
Paradoxically, the MSCI World AC is up 3.1% annualised in the same period
Majority of appreciation has happened on expanding valuation multiples
10-year annualised corporate earnings at lowest since 2005. Photo: iStock
By Peter Garnry
This chart of 10-year annualised growth in net income across US, European and global companies is staggering. It shows that earnings growth has not been weaker among global companies since 2005.
The 10-year annualised growth rate in the MSCI World AC Index is down to 1.4%. If we deduct global inflation of around 3% the past 10 years then real profit growth has been negative 1.6%/year. Nevertheless, the MSCI World AC is up 3.1% annualised in the same period (2005-16) and 5.9% annualised if dividends had been reinvested.
So the price investors are willing to pay for realised earnings have gone up in a period with earnings and macro growth slowing down rapidly.
This valuation multiple expansion has only happened thanks to central banks pushing down alternative investments down in expected yield terms. The chart below shows the current situation in the equities/fixed-income space in Europe.
— Edited by Martin O'Rourke
Peter Garnry is head of equities strategy at Saxo Bank