Economic data have been coming in far weaker than expected almost across the board, but that hasn’t led analysts to trim their estimates for GDP growth.
That could be a problem for the stock market, according to Pierre Lapointe, global macro strategist at Brockhouse Cooper.
He says the consensus estimate for U.S. GDP growth this year is running at 2.2 per cent. But the slew of recent, dismal economic figures have led him to conclude that growth could end up being far weaker, at only 1.5 per cent. While this means the U.S. won’t sink back into recession, the pace of growth will be excruciatingly slow and well below the level anticipated by investors.
The problem arises for the stock market because investors are still counting on the higher growth figure, which implies decent profitability and employment figures. If growth comes in far lower than anticipated, there could be disappointment. “We expect the market to pull back on that,” he said in an interview. “The stock market doesn’t like negative surprises.”
Just how weak U.S. data are was highlighted Friday, when all three major reports released – on industrial production, consumer sentiment, and New York state manufacturing conditions – came in well below expectations.
A few analysts downgraded their U.S. growth outlooks in reaction to the poor numbers, although the downward revisions have been few and far between.
“In light of the weak retail sales figures over the past couple of months, and the weaker industrial production data. we're lowering our call for [second-quarter] U.S. real GDP growth from 2 per cent to about 1.8 per cent,” said Jennifer Lee, senior economist at BMO Capital Markets in a note to clients.
Mr. Lapointe believes markets are vulnerable to further weaker-than-expected economic releases, or to a rash of actual downward revisions to growth estimates by analysts, should they start to change their outlook based on the lacklustre data. In either case, the result could take stock markets down a notch.
“The first two quarters [of 2012] really show a deterioration, a deceleration of the global economy and I think it’s only a matter of time until we get either disappointment from lower than expected numbers or actual downward revisions,” he says.
Overly rosy economic projections aren’t merely a U.S. phenomenon.
Mr. Lapointe, in a note to clients on the subject, looked at other regions and found the same thing. In Asia, he says economic growth expectations “remain elevated” at 6.9 per cent, and even in China, where authorities have set a target for GDP growth of 7.5 per cent for the year to guide private forecasts, the consensus remains far more optimistic, at 8.2 per cent.
Meanwhile, in Europe, purchasing managers indexes are trending lower and are at levels associated with recessions, but economists continue to project the region’s GDP will only shrink by a minuscule 0.1 per cent.
Profit expectations haven’t been tweaked downward in response to slowing growth, another potential stock market negative, he said and profitability “is rolling over in all regions.”
Investors should brace themselves for profit expectations to be cut down by the reality of slowing growth.
“With disappointing economic data and profit margins turning lower everywhere, one has [to] wonder why we have not seen more downward revisions....However, the risk for the market is that the consensus of economists and analysts is still too optimistic. Downward revisions or economic data/earnings misses will not sit well with market participants,” Mr. Lapointe concluded.