The outlook for global growth has never been worse.
That was one, among several, key takeaways from the May vintage of BofA’s Global Fund Manager survey, which also showed cash levels rising to the highest since 9/11 and suggested investors abandoned tech shares and soured on equities in general.
The net percentage expecting a stronger global economy dropped to an all-time low at -72% (figure below).
288 participants representing some $900 billion in AUM responded to the Global FMS questions this month.
There’s no mystery here. It’s nearly impossible to conjure an overtly upbeat assessment for any major economy. Europe is destined for some version of stagflation, China refuses to get out of its own way (notwithstanding nods to loosening restrictions in Shanghai), the Fed appears condemned to engineering a recession in the US and the UK is staring down the most acute cost of living crisis in modern history (UK households face a £2,370 average increase in their bills this year, a new study showed).
The same BofA survey found stagflation expectations (as proxied by respondents who see below-trend growth and above-trend inflation) soared to 77%, the highest since the eve of Lehman’s collapse.
In an environment of decelerating growth and soaring costs for necessities, the outlook for corporate profits is increasingly bleak. Throw in demands for higher wages and margins look vulnerable indeed. That too showed up in the BofA poll.
“Global profit expectations slumped past COVID-low levels to net -66%, the weakest since October 2008,” the bank’s Michael Hartnett wrote, adding that “lows in global profit expectations are consistent with other crisis moments” including LTCM, dot-com, Lehman, and COVID. All of those events are annotated in the figure (above).
Covering this may seem gratuitous, but the point isn’t gloom for the sake of it. Rather, I wanted to reiterate that 2022’s equity swoon has been primarily a valuation story — a de-rating precipitated by central bank tightening and rising rates.
If profit growth decelerates (or earnings actually shrink), the valuation bear market could morph into something more fundamental, perhaps presaging a new phase as lower multiples are applied to lower earnings.
Oh, and remember: You can have a profit recession without an economic downturn.
H-Man, if it walks like a duck, well you get the drift —- until something in the macro reverts to some semblance of the mean—- we have a big storm approaching land fall.