Business

Earnings, Sentiment More Important Than Rates: Barclays

Earnings key

The S&P 500 gained yesterday after investors were encouraged by the minutes from the U.S. Federal Reserve’s latest meeting or so the pundits tell us. The Fed is widely expected to raise interest rates next month, and while some believe this will hurt stock prices, Barclays analysts say it doesn’t have to.

Above average returns expected next year

The end of the summer was a virtual bloodbath as investor sentiment took a nosedive amid heavy selling from non-resident investors.

Earnings

Barclays analyst Ian Scott and his team say that situations just like this have historically resulted in positive returns as usually above average returns follow times of heavy selling by non-resident investors.

Earnings

Earnings growth to recover

They peg global growth at 3.4% for next year and believe the drag on oil prices will be removed. This should mean that next year, earnings recover to 7% growth, as the correlation between global growth and earnings growth is demonstrated in this graph:

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The Barclays team notes that around the globe, most valuations are either in line with the average or just a bit below them, and thus they aren’t a barrier to performance if earnings do recover. In fact, they say the global market is less expensive now than it has been at the beginning of previous tightening cycles in the U.S.

Scott and his team think Fed policy could, however, have an impact on leadership. They note that previously higher interest rates meant that investors preferred value stocks over growth and quality stocks.

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In fact, they say value stocks are currently at the cheapest level they have been compared to growth stocks since the 2000s-era tech bubble.

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At the same time, they said the performance of Consumer Discretionary stocks and other early cycle cyclical stocks were inhibited.

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They believe that as the Fed raises interest rates and earnings per share growth hits an inflection point, non-U.S. stocks should begin to lead the way. They see the best opportunities for earnings growth in continental Europe, the U.K. and Japan.

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U.S. stock market at a premium

The Barclays team notes that currently the U.S. stock market is trading at a 30% premium to non-U.S> stock markets.

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For 2016, they expect revenue growth to tick back to the positive side from -3% this year to 2% growth next year as nominal gross domestic product growth recovers from 2.5% to 4%. However, they say the strength of the U.S. dollar will likely temper this somewhat. Barclays expects the dollar to strengthen by another 7%.

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All graphs and charts in this article are courtesy Barclays.