Year-to-date, the S&P 500 is up by 16% and the MSCI All Country World Index (ACWI) also gained 12%. In this article, we look at one leading indicator great for identifying turning points in global stock markets.

I. Proportion of Industries with EPS Growth Rate above the 12-Month Average

The Global Industry Classification Standard (GICS) categorizes companies around the world into 11 sectors and 25 industry groups. For example, the Information Technology sector is composed of three industry groups: Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment.

Our analysis of earnings per share (EPS) trends across the 25 industry groups reveals a useful indicator for identifying potential stock market reversals. As shown in the chart, we calculate the proportion of industry groups in the U.S. whose EPS growth exceeds their 12-month average. The blue line represents the share of industry groups with trailing EPS growth rates above the 12-month average, while the yellow line shows the share of industry groups whose one-year forward EPS growth, i.e. projected EPS growth over the next year, exceeds the 12-month average.

Composed of stocks from 23 developed and 24 emerging markets, the MSCI ACWI Index covers 85% of investable equities globally. Notably, U.S. equities account for around 63.8% of the ACWI Index. Besides the sizable weighting, as American companies are major clients for suppliers worldwide, tracking EPS trends of U.S. stocks provides valuable insights into broader global equity market movements.

II. One Quarter Ahead: How the EPS Indicators Lead MSCI ACWI

A higher share of industry groups with EPS growth above the 12-month average indicates EPS growth rates are rising in more industries, which typically translates to continued upward revisions of corporate earnings forecasts, fueling stock market gains.

The indicator for one-year forward EPS growth can even serve as a leading indicator. Our analysis shows that, historically, a peak in the share of industry groups whose one-year forward EPS growth is above the 12-month average led a peak in the MSCI ACWI by approximately one quarter.

When the proportion surpasses 90%, investors should start monitoring for the risk of a potential stock market reversal. And a decline from the peak would suggest market sentiment regarding corporate profitability is shifting, which could lead to a stock market correction.

MM Takeaways

Looking back, periods of financial crises or global economic downturns all saw sharp declines in EPS due to plummeting corporate profits, such was the case during the 2002 dot-com bubble, the 2008 financial crisis, and the 2020 COVID-19 pandemic. Once the economy recovered and corporate profitability improved, the proportion of industries with EPS growth above the 12-month average gradually rebounded.

Since 2023, the proportion of industries with EPS growth above the 12-month average has been steadily increasing. As of June 2024, forward EPS growth rates of approximately 83% of the industries for U.S. equities exceed their 12-month averages, suggesting earnings momentum is still strong enough to support further stock gains in the short term.

That said, it’s important to note that as weaker industries catch up, we should start monitoring the possibility of the proportion indicator for forward EPS growth reversing downward, potentially during Q4 this year or Q1 next year. Historically, such a turning point would suggest market correction risk ahead. We recommend keeping a close eye on this indicator for potential reversals in the global stock market.

Spotlight

More Spotlights...