With no end to the war with Iran in sight for the time being, talk of a recession is resurfacing. Yet other indicators suggest that the bull market is far from over.
To understand this, we travel to Singapore, where profits from electronics exports have skyrocketed. The chart below compares Singapore’s year-on-year electronics exports with the annual profit growth of companies in the MSCI World Index. Electronics exports are roughly 75 percent higher than a year ago. That is a larger increase than the recovery that followed the Great Financial Crisis of 2008.
The chart shows that electronics exports are a reasonably good predictor of how profits in the MSCI World Index will develop. If the trend lines follow even a fraction of their past behaviour, we should see profit growth of at least 50 percent on an annual basis.
In fact, following two of the three export peaks, global corporate earnings rose even more sharply than one might have expected based on those peaks. It should be clear that, provided the relationship holds even slightly, it is difficult to argue that shares are so expensive.
The boom is real
It’s not hard to guess where that extreme surge in exports is coming from. Especially not when you realise that a graph showing Korean or Taiwanese export figures paints an identical picture. After all, all three countries are a crucial link in the semiconductor supply chain. Or rather, in the AI investment boom.
This also explains why global profit growth of more than 50 percent across all sectors is likely too ambitious. After all, not all sectors are benefiting equally from the AI boom. Particularly software companies are lagging behind. On the other hand, energy shares, tanker companies and other sectors are actually benefiting from the ongoing unrest in the Middle East.
The bull is proud
If profit growth does not accelerate in the coming months, that would be a clear break in the trend, a scenario which is difficult to imagine without a sudden, severe crisis or some other external shock.
If history is any guide, the odds favor further rising share prices. Declining valuations driven by strong earnings growth provide a solid foundation for a sustained extension of the rally.
Jeroen Blokland analyzes striking, up-to-date charts on the financial markets and macroeconomy. He is also the manager of the Blokland Smart Multi-Asset Fund, which invests in equities, gold, and bitcoin.