Slower Growth May Put $1.3 Trillion Payout at Risk

After Friday’s sharp re-pricing in European stocks on both the Brexit and trade fronts, the question is: does this rally have legs? The fact that the S&P 500 ended well off its session high on Friday and that index futures are mixed this morning could be a sign that the “phase one” deal between the U.S. and China might not be a major boost after all. As for Brexit, let’s see what happens in the coming days. But beyond that, the earnings season that kicks off this week could provide a good indication of what may come next for stocks. And the question of dividend sustainability will be taking center stage.

Dividends are a function of profit, and the problem is: there is no profit growth right now. Morgan Stanley strategists expect European companies to report a 2% fall in earnings per share in the third quarter, and they say expectations for the fourth quarter are still too high. Bottom-up analysts have been relentlessly downgrading estimates most of the year, and especially over the past six months.