It will not be a great shock to ZH readers, but the sad truth (no matter what one is told by the plethora of talking heads and commission takers) is that neither EPS upgrades or EPS outlooks are in any way correlated to equity market performance. Instead, the central bank balance sheet size and forward inflation expectations are the key factors. As Credit Suisse notes, in fact over the past few years, EPS upgrades and outlooks are negatively correlated with stocks!
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Even as current inflation (CPI) is supposedly fading, forward inflation expectations have risen and supported equity P/E valuations.
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and until recently, central bank balance sheets remain supportive of stocks...
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However, in the last few weeks, as stocks have surged ahead, a few things have changed with the world's central banks seeing the lowest growth in their balance sheets since the crisis began...
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and in the last few weeks, forward inflation expectations have dropped notably - after peaking at post-crisis peaks once again...
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So, it's not at all about the fundamentals; it's about the central banks and inflation - and in the short-term, they are losing some willpower - as the ECB is loathed to expand its balance sheet (which is the current drag) and implicitly weaken its currency (as we discussed earlier).
Source: Credit Suisse and Bloomberg
