The growth of corporate earnings has been slower than in past recoveries but has been more stable than macroeconomic variables and financial markets. This resilience looks all the more remarkable, when set against the backdrop of recurrent crises, mostly regional but with possible global implications.
Cost savings still accounting for most corporate earnings
Cost-cutting has accounted for much of earnings growth deep into this moderate recovery, as most companies still refrain from bold expansion plans and see cash flows as the main defense against any downturn. In an uncertain environment, sales revenues have only at times replaced cost-cutting as the main source of profits.
Based upon a very long period of observations, when above-trend operating earnings come along with below-trend inflation expectations, growth-sensitive assets (equities and corporate bonds alike) have provided the best returns over a 12-month horizon. Risk factors may lead to a more defensive allocation, implying less exposure to risky assets for tactical purposes. The downgrade of corporate bonds was a case in point of late.
The headwinds to global earnings growth include: a disorderly exit from quantitative easing due to mounting inflation expectations and the elusive political solution to the euro debt crisis. Pioneer Investments is mindful of these risks but not overly concerned for their base case.
You may access Pioneer Investments' Global Market Strategy Report - October 2013, through this link.