Corporate earnings follow economic momentum

The economy in the euro zone has cooled noticeably in recent months. The slowdown in growth momentum has not been uniform in the individual countries. Rather, the different growth models of the countries are clearly visible here. The weaker economic momentum is mainly driven by lower growth in world trade, which is mainly reflected in declining foreign trade surpluses, with weaker demand for capital goods being particularly visible. Domestic economic development, on the other hand, is still relatively stable. This is certainly also due to continued high employment and stable disposable incomes.

The result of this development is falling capacity utilization and productivity. The latter should weaken international competitiveness in the medium term. Inflation rates will remain relatively low. This limits the scope for companies to pass on prices. Cost increases are therefore very difficult to pass on. This development, which is unfavorable for companies, is now slowly making itself felt in the profit expectations of listed companies. Earnings expectations have been falling for some time now and a recession in earnings is currently expected for 2019.

The weaker economy and declining earnings development are not yet reflected in the European stock markets. These negative factors will be offset by a loosening of the monetary policy environment. However, one should expect the weak fundamental environment to prevail in the medium term, as the possibilities of the central bank are limited.

 

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