Have Estimate Revisions Bottomed?October 21, 2014
A few weeks ago we discussed how the USD was negatively impacting sales and EPS estimate revisions. The dollar’s rise since then has stalled somewhat which has us wondering if we have seen a bottom in sales and EPS revisions? Current levels of the percent of stocks with positive sales and EPS estimates revisions for the MSCI World Index are at levels that have recently been the cyclical trough (red line in the next two charts).
However, it looks like the dollar just needed a breather after recently completing the largest 3-month annualized gain since December 2008. The dollar also has the benefit of a 10-year government debt market that is currently yielding between 89 bps and 171 bps more than other major bond markets in the world. Finally, on a CPI-differential purchasing power basis, the USD has moved to it’s strongest (albeit still net-weak) position relatively to 18 other currencies since 2010. As the last chart shows, trends in PPP tend to play out over years so a reversal would be surprising but not completely unprecedented. If the dollar does continue to advance, we would most likely expect revisions to make another downleg as well.