Though perhaps still not that close.
And it’s not just a European thing, though by at least one model Europe does bear the highest risk of falling into a profits recession of any region in the world:
The chart is from a proprietary model used by Citigroup comprised of factors that historically have predicted profits recessions (insert past does not always equal future caveat here).
Citi writes that increasingly lower forecasts for economic growth have led them to revise their profits estimates. But it hasn’t soured on this profits cycle just yet, and actually thinks global equities are now underpriced… emphasis ours:
Our new forecast for global EPS growth is 12% for 2011 (previously 18%) and 9% in 2012 (11%). Bottom-up consensus forecasts for 2012 are 15%, while the stock market is discounting a 5-10% contraction, in our view… We believe global stock prices will continue to grind higher with EPS until there are clearer signs of a peak in the current global profits cycle. Our best guess is that this peak will be sometime in 2013 — beyond the horizon for most investors. …
Equity markets are, quite reasonably, questioning the sustainability of current corporate earnings and may even be starting to price in a fall in profits. Valuations for global equities are approaching lows we saw in the 2008-09 bear market when EPS halved. Global equities trade on 1.6x price to book (1.2x in March 2009). The long-term average has been 2.1x. The global price to trend (10-year average) earnings ratio is 16.8x (25x is the long-term average). Outside of the recent bear market, both these measures suggest equities are as cheap as they were in the early/mid 1980s. There seems to be plenty of bad news discounted.
Okay, though given the pace of downward revisions lately, we wouldn’t be surprised if expectations for growth keep heading south to converge with asset prices, rather than the other way round. And given the political paralysis consuming policymakers across the developed world, well…
Once again, consensus beware.
Related link:
“Dangerously close to recession” – earnings edition – FT Alphaville