The weaker dollar and tentative signs global growth will soon turn up point to a rise in US and global earnings growth, adding a support to equities.
As the US earnings season gets going, aggregate annual EPS growth for the S&P continues to slide.
But there is some light at the end of the tunnel. The steady weakening in the dollar seen since September should soon provide a tailwind for US earnings.
This comes at the time of a nascent upturn in global growth.
Taiwan, as a small, open economy, and a major producer of a highly cyclical product – semiconductors - is very sensitive to the cross-currents in the global economy.
The ups and downs in Taiwan’s export growth typically lead the ups and downs in global EPS growth.
Furthermore, leading data for US manufacturing is turning up. The ISM new orders-to-inventory ratio gives a short lead on the headline index, and has pronouncedly turned up. Manufacturing is highly cyclical and the US ISM is the sine qua non of macro indicators of global growth.
All this is supportive of US and global earnings. However, the primary endogenous risk is inflation. Expectations are that inflation keeps going down and stays down, but a re-acceleration would upset the apple cart. The dollar would likely begin strengthening – imperiling US earnings – while the depressive impact it would have on excess liquidity would jeopardize the expected upturn in global growth.
The disinflation trend is creating a sweet spot for assets and the global economy for now, but a re-rise in inflation would leave the outlook less favorable.
