Long wait ahead for eurozone earnings growth

Onwards we go, but not upwards. Call it moderation or stagnation, but the near future appears set to remain much like the present arrangement of modest economic growth and scarce investment income. So the right question to ask may not be 'what happens next', but rather 'when will something, anything, change?'

There are a few ways to answer. Short-term interest rate futures give a sense of market expectations for the timing of the first hikes by central banks. In recent weeks, the trade has been to bet on further stasis, catching up to what the Bank of England's chief economist has called the "drip, drip, drip of slightly below par news". After the release on Wednesday of minutes from the most recent Monetary Policy Committee, the market view is for no change until well into the third quarter of next year. In the US, where inflation has softened, futures markets suggest a rate rise from the Federal Reserve is more than a year away. For the European Central Bank, think about 2017.

That last year is also suggested by another forecasting approach, using corporate earnings. On current forecasts, it will not be until 2017 that listed European companies produce as much profit in aggregate as they did at the peak of the last economic cycle, in 2007.

European stock prices provide further perspective. The equity risk premium is the return that investors demand over and above that available from safe government bonds. Over time, the average equity risk premium has been 3.5 per cent, and Goldman Sachs uses that figure to estimate the long term rate of earnings growth embedded in stock prices. Historically, earnings grew by 5 per cent a year, but the implied rate of real growth for earnings has fallen steadily, and is now negative. On that basis, stock prices imply that earnings for European companies will decline substantially over the long term.

Perhaps the equity risk premium is higher, to compensate for the very low return available from government bonds - or increased risk of investing in stocks compared to the past. But, even if you assume it is 5 per cent, that implies no real growth in earnings at all for the next 20 years. Stasis may have become familiar, but that seems like a very long time to assume that nothing will change.

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