The problem with synchronized global growth

March 26, 2018 02:00 PM

For many equity analysts, the ebb-and-flow of stocks is seen from their daily price movements. Below that is a deeper earnings estimate revision battle shifting the deeper trading currents between bulls and bears. 

What does this usually mean? One side of the market (the buyers) sees the coming earnings glass as half full. They think current stock valuations are in line with those improvements and then buy the stock. The other side (the sellers) of the market see the coming earnings glass as half empty. They note valuations are stretched beyond the ability of underlying fundamentals to support them. They get out, or get short. 

Up until February, global share price momentum has been uniquely one-sided. All of the earnings news has supported the bulls in a novel era of synchronized global growth. 

It started off great, but has gotten out of control. How did we get here? Inside its November 2017 quarterly economic outlook, the Organization for Economic Cooperation and Development (OECD) data showed a universally improved situation. According to this Paris-based group, real GDP growth is synchronized globally now. That meant no major economy has been in contraction mode for the first time since 2007. World GDP will advance +3.6% in 2017 — its best year since 2011 — and they expect +3.7% growth in 2018. This key OECD world growth mark in 2016 was +3.1%.

With that knowledge in hand, let’s turn our attention to a specific global industry: manufacturing, construction and mining, and its share price story. It can update us on where this whole synchronized global growth story is currently. These are the guys who make the big earth-moving equipment to sell or rent.

For a stretched valuation reference point, consider the following. The manufacturing, construction and mining industry forward 12-month P/E ratio is 22.6. The S&P 500 is 18.5. Underneath stretched valuations, a fully positive top-down earnings estimate story shows why this industry’s share price momentum stays on. The Zacks Industry Rank is high at #25 in the first week of February 2018. It was even higher the week prior, at #16 out of 265. There were three positive company earnings estimate revisions to add to the picture, and just one negative revision.

The problem with this should be obvious; the bulls are getting all the confirmation and the bears, nothing. That leads to a very unstable, momentum trading share price that could lead to moves like we saw in early February. Two individual stock stories from this sector elaborate on this one-sided them: Caterpillar (CAT) and H&E Equipment Services (HEES), see “Two to watch.”  

About the Author

John Blank, Zacks Investment Research