Stronger global growth should continue to power an acceleration in corporate earnings over the remainder of the year.
Global earnings revision ratio has turned positive for the first time in six years, implying that analysts have been behind the curve in revising up profit projections. Our profit indicators remain constructive for the U.S., Eurozone and Japan. In fact, our model suggests that U.S. EPS growth has a very good shot at matching perpetually optimistic bottom-up estimates for 2017.
Admittedly, it is disconcerting that the rally in oil prices has faltered in recent days as investors worry that increased U.S. shale production will thwart OPEC’s plans to trim bloated inventories. Without trimming stockpiles to more normal levels, storage capacity remains too close to topping out, which raises the risk of another price collapse.
A breakdown in oil prices could spark a major correction in the broader equity market. However, our commodity strategists expect the OPEC/Russia production cuts to be extended when OPEC meets on May 25. Consequently, we expect WTI and Brent to trade on either side of $60/bbl by December, and to average $55/bbl to 2020.
Bottom Line: Stronger global growth will lead to stronger corporate earnings growth and underpin global equities. Weaker oil prices pose a downside risk, which we are monitoring.