“There is a “profit recession”, the bank says, “global EPS is down 10% since the middle of last year (EPS ex-energy down 4.5%).
And, it adds, it is not only the energy sector that has suffered, earnings per share are sharply down across most sectors, with only tech and health care in an earnings uptrend in the US.
For those investors currently ‘looking through’ the the current eps weakness, the bank says they will need to see a recovery in US retail sales, low European inflation and a stabilisation in Chinese PMIs to be somewhat comforted their optimism is justified.
“In our view, a bearish game changer would be acceleration in the US Q1 Employment Cost Index. We believe weak EPS tied to US wage pressures would be unambiguously bearish,” it added.
Outlook
At present, BAML is ‘cynically’ bullish and expects volatility to pick up. But, it added: “Max liquidity/minimal rates has permitted corporate equities and bonds to ignore the global profit recession. We believe that changes if inflation unexpectedly picks up in U.S. or Germany. We are skeptical, not least due to “creative disruption/deflation” of the tech revolution. But investors appear so underexposed to inflation assets…we recommend adding some gold, vol, and cash.”
Sullivan takes it a step further: “We all recognise there are big losses ahead for bond holders, we just don’t know when – it could be 20 years from now if Japan is a blueprint
