So that global market selloff may have eased -- a little. It would still be foolish to ignore the implicit warning about the revving up of risk appetite since Britain's historic vote to quit the EU. In Europe, in particular, there's a real danger of over-optimism about corporate earnings.
European markets over the summer enjoyed a more pronounced rebound than in the U.S. or globally. Blue chip equities in the euro zone rose about 5.5 percent over July and August, versus a 4 percent gain for the MSCI World index and a 3 percent rise on the S&P 500. Investors were betting that stocks were in a "win-win" situation: central banks would keep the money taps on, while macroeconomic data pointed to a recovery in corporate profits. The European cyclical sectors of cars and banks got a big boost, up 14 and 10 percent respectively in the same period.
The problem is that "win-win" might become "lose-lose", as JPMorgan strategists put it. Confidence is ebbing in the ability of central banks to spur demand, regardless of whether the U.S. hikes rates. Despite extra firepower from the ECB, Germany's 10-year bond yield has touched its highest level since June 24 (the day after the British out vote). The euro is higher against the dollar today than at the start of the year.
Some of the most recent data, including German industrial production and U.S. services, haven't been entirely encouraging. Predictions of pan-European earnings rising 13 percent next year -- the consensus view of analysts, according to Bloomberg -- may end up being disappointed. If so, that's another setback for Europe, where profit hasn't recovered yet from the financial crisis. Earnings per share have fallen 40 percent over the last decade for European equities, versus a rise of more than 30 percent in the U.S.
It's true that the commodity rout has stabilized and that emerging markets, a source of revenue for top European companies, have recovered. That's why earnings upgrades in August outpaced downgrades for the first time in 15 months, according to UBS. But gambling that things can't get any worse often proves a losing bet when it comes to the euro zone. Since 2011, consensus European earnings forecasts have been cut 7 to 15 percent every calendar year, according to UBS figures.
And while the markets may have decided in the short term to take the Brexit vote in their stride, their insouciance may be misplaced. A new uncertainty gauge from Bloomberg Intelligence suggests a "wait-and-see" approach to spending from companies and households could shave 0.2 percentage points from euro area GDP growth next year. This would imply more volatility for everything from stock prices to capital spending -- earnings are unlikely to be immune.
Global worries, in other words, may turn out to have a deeper impact on Europe than elsewhere. European equities trade at about 16 times earnings, versus 18 times for the S&P 500. As grim as the outlook has been for Europe, that discount could deepen -- perhaps even to 14 times, according to Manu Vandenbulcke at NN Investment Partners. If bond yields drop back, that will offer support. But nothing is as sustainable as a genuine recovery in profit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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