While we don’t want to add more bad news to this story, the outlook for corporate profits is also showing some deterioration.  The chart below shows the Global Earnings Revision Index as tracked by Citigroup.   With the index remaining below zero it means that we are seeing more negative revisions to earnings than positive revisions.  While this indicator has been weak for most of the past five years, it appears to have worsened in the past year and is now closing in on the low levels seen during the Financial Crisis in 2008.   The good news here is that also means that expectations have come down a long way and we could be getting closer to the bottom.

Global Profit Estimates Slashed

While we had been exceptionally bearish on the outlook for stocks over most of the past eighteen months, we are not expecting a recession anytime soon and we still think that stocks can rebound once valuations have been brought down to more normal levels, investor exuberance is reduced and economic growth stabilizes.  We are not bearish on the stock market over the longer term and are always looking for opportunities to add to strong stocks and industries at reasonable valuations.  The stock market ‘carnage’ over the past year is starting to create some opportunities.  We did use the weakness in the first half of January to add to some positions in the technology, financial service and even the energy sector in both the U.S. and Canada.   We also think that the German stock market could be one of the better performers outside of North America as that market is under-valued relative to historical levels, the economy is recovering and they also have the benefit of continued monetary support from the ECB with their Quantitative Easing.  The Euro also appears to have found a bottom versus the U.S. dollar, which would be more of a ‘tailwind’ for investments in that market going forward.

If that is starting to make us sound a bit more optimistic about the outlook then we will have to deal with the following problem:

“In investing, a bull sounds like a reckless cheerleader, while a bear sounds like a sharp mind who has dug past the headlines – despite the record of the S&P 500 rising 18,000-fold over the last century… Alas, few care about past results when someone else is warning about The Next Great Depression… This goes beyond investing.  Harvard professor Teresa Amabile shows that those publishing negative book reviews are seen as smarter and more competent than those giving positive reviews of the same book. ‘Only pessimism sounds profound. Optimism sounds superficial. Why Does Pessimism Sound So Smart?”

– Motley Fool

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