Valuation

Downward revisions are in fashion this summer. Eventually, they should be followed by upward revisions, which might be in season later this year. Yesterday, the IMF cut its forecast for global economic growth. Also yesterday, economists lowered their Q2 forecasts for real GDP in the US following a weaker-than-expected retail sales report for June.

Last Friday, Citigroup’s Economic Surprise Index (ESI) was at -64. It’s been fluctuating around this level for the past two weeks. Last time it was this low was about a year ago. It’s slightly below 2010’s lowest reading. The forward P/E of the S&P 500 is positively correlated with the index. The former tends to rise or fall when the latter is doing the same.

The weakening outlook for global and US economic growth is driving the 10-year Treasury bond yield to record lows. Prior to 2007, falling bond yields tended to boost the P/E multiple. Since then the P/E has tended to rise and fall along with the yield.

The good news is that the S&P 500’s P/E is holding up reasonably well so far this year. While the ESI is down from a peak of +92 at the start of the year to -64 now and the bond yield remains at a record low, the P/E peaked at 12.9 on March 26, fell to 11.5 on June 1, but is back to 12.0 presently. It remains well above last year’s low of 10.2 on October 3.

Today's Morning Briefing: Global Revenues Outlook. (1) Downward revisions for global and US growth. (2) Economic Surprise Index deep in negative territory. (3) Valuation multiple down, but not out. (4) IMF global forecast jibes with our S&P 500 revenues forecast. (5) A good proxy for revenues is up 5%. (6) Retail sales are down, and up. (7) The IMF’s assumptions. (8) German Constitutional Court has a date. (9) China is building more trains again. (More for subscribers.)