A major hazard for investors is becoming too entrenched in their beliefs, especially when evidence suggests a different narrative. While the idea of a “soft landing” may seem overly optimistic, it’s undeniable that some bastions of investment remain resilient, as evidenced by sustained corporate profits.
Mismatch
This chart contrasts my bellwether earnings indicator (black line) with actual earnings growth (green line). This indicator comprises four key components:
- Global Semiconductor Sales
- Singapore Electronics Exports
- South Korean Exports
- China Producer Prices (PPI)
Except for Chinese producer prices, these components are tied to global trade and growth, indicative of highly open economies. The rationale behind including Chinese PPI is China’s status as a global manufacturing hub. Fluctuations in producer prices here can signal shifts in global economic activity.
Predictive power
This earnings indicator has historically been reliable, with each component offering predictive insights into future earnings growth. Notably, despite earlier projections of negative earnings growth, this downturn hasn’t materialized.
Recently, the indicator has shown signs of improvement, currently suggesting a slight earnings decline. Surprisingly, corporate profits may withstand weak global growth, partially due to the lingering effects of Covid-19. This doesn’t necessarily imply a continuous uptrend in stocks, given the mixed signals from other macroeconomic indicators. However, tools like the bellwether earnings indicator remain crucial for investors to adapt their strategies in response to changing market conditions.
Jeroen Blokland, founder of True Insights, offers independent research for building diversified multi-asset portfolios. Formerly leading multi-assets at Robeco, Blokland’s weekly chart analysis is a regular feature every Monday on Investment Officer Luxembourg.