Global stocks look set to surge from here.
It’s because they are about to pass a significant earnings milestone. Here’s what’s happening and why it’s good news for equity investors.
Earnings per share for all the public companies in the world could be about to surpass $30, according to a recent report from brokerage company Charles Schwab. The firm bases that figure on an analysis of consensus EPS estimates for the next 12 months for the stocks in the MSCI All Country World Index.
The report notes that profits have reached this level on three prior occasions over the past decade. In 2008, prices began to fade during the global financial crisis; in 2011, the problem was recessions in Japan and Europe; and in 2014, the crash in oil prices depressed energy earnings.
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But this time, company income should go even higher. “Thanks to solid global growth supporting all the major regions of the world a break out above $30 now appears more likely than it has in a decade,” the Schwab report states. “All of the world’s top 20 economies are growing in 2017, marking the first year this has happened since 2010.”
The report also points to a robust forecast for 2018 from the International Monetary Fund, and surprising strength from Europe’s economies.
Stock prices follow earnings, over time. “There are not a lot of certainties in investing, but one of them is that if earnings do well, then most likely stocks will go up,” says Peter Andersen, chief investment officer at Fiduciary Trust Company in Boston. “It works over long periods of time.”
Better still, he thinks the U.S. economy at least is well positioned.
“I think U.S. earnings are poised very well despite the fact that we have all these other unrelated tensions such a geopolitical issues, political conflict in Washington,” he says. “The basic operations of companies are doing well financially, and you also see companies buying other companies.”
When one firm in the same industry purchases another, it is usually considered a sign of optimism because the managers have detailed knowledge of how the businesses operate. They wouldn’t spend a load of money on buying another firm unless they thought there was a probability of making even bigger profits.
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Cash flow. Earnings aren’t the only thing that matter. “One reason that the market has done well in an earnings environment is that cash flow has been outstanding, says Mark Stoeckle, CEO of Adams Funds in Baltimore, Maryland. “A lot of companies and a lot of sectors where the cash flow has been enormous.”
Company earnings and how much cash they make don’t always match. Sometimes there is a small cash component to the profits and sometimes, as Stoeckle mentions, a large one.
If firms continue to generate substantial cash profits, then they tend to either spend it on new ventures, which is good for the economy and often future income. Separately, they sometimes increase the size of the dividends paid out to investors.
A skeptical outlook. Not everyone is so sanguine about the earnings outlook. “The fact that we are getting to a place that has halted the market before is significant,” says Rick Bensignor, veteran Wall Street strategist and founder of Intheknowtrader.com in New York. “Unless there is a new dynamic that thrusts us through, then there could be a problem.”
But even if there’s an unseen economic problem on the road ahead, there is also the potential for government to help. If the Trump administration can roll back some more of the restrictive industry regulations then that may be a catalyst to push earnings a lot higher in the U.S., Bensingor says.
How to invest. To get exposure to global stocks you need a global fund. That means that the SPDR S&P500 exchange-traded fund (ticker: SPY) alone won’t do. It tracks the S&P 500 index and has expenses of 0.1 percent or $10 per $10,000 invested. But unfortunately, it includes only U.S. stocks.
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For a better way to get global exposure consider the Vanguard Total World Stock Index Fund Investor Shares ( VTWSX) and the Vanguard Total World Stock ( VT) ETF, both of which hold U.S. and non-U.S stocks. They have expenses of 0.21 and 0.11 percent, respectively or $21 and $11 per $10,000 invested.
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Why Global Stocks Should Surge From Here originally appeared on usnews.com
