Article / 30 June 2016 at 15:31 GMT

Spectacular fall in long-run corporate earnings growth

Head of Equity Strategy / Saxo Bank
  • 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.

Corporate profit growth
The majority of this appreciation has happened on the backdrop of expanding valuation multiples. The trailing P/E ratio has gone from 16.7 to 20 in that same period.

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.

Dividend yield vs bond yields in Europe
The 10-year annualised growth rates are obviously pulled downwards by earnings reaching a very high level in aggregate terms in the summer 2006 before the credit crisis evaporated earnings. Since I circulated the first research note to clients, I had many coming back saying they would like the aggregate corporate earnings as well, so below I have inserted the chart.

Global corporate earnings since 1995

The current base effects will extend into 2017 as 2007 had even higher aggregate earnings than 2006. However, the base effect will disappear as we move into 2018 and 2019. But it does not change the fact that we are indeed operating in a historically low-growth environment in terms of both macro and corporate earnings.

— Edited by Martin O'Rourke

Peter Garnry is head of equities strategy at Saxo Bank


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