Corporate Profits

Stocks whipsawed violently last week. Volatility could intensify if recent whiffs of a domestic economic slowdown proliferate and the Fed still adopts a more hawkish tone.

The Chinese corporate sector has been reluctant to expand, focusing instead on destocking inventory and hoarding cash. This protects the corporate sector balance sheet, but is not conducive for strong GDP expansion. Q1 earnings reports confirm that an upturn in the Chinese profit cycle is unfolding.

U.S. dollar softness has failed to lift equities of late, a tentative warning that correlations are changing as the U.S. economy cools.

It is widely perceived that China suffers from a massive capital misallocation problem. Our indicators defy this conventional wisdom.

Profits are bottoming but the outlook is lackluster, even if further dollar weakness provides a temporary boost.

This week <i>U.S. Equity Strategy</i> is sending you the latest <i>BCA Special Report</i>, where Mark McClellan and Anastasios Avgeriou tackle the questions of "Global Earnings Recession: How Deep? How Long?"

Earnings-per-share (EPS) for the MSCI all-country world index are estimated to have fallen by 7% in the year to March, the fourth quarter in a row of annual decline. The length and depth of the profits recession is key to the appropriate equity allocation, especially given that stocks are not…

Our sense is that the current reflation trade will extend into the summer, sending stock and commodity prices higher and the U.S. dollar down. Global government bond yields should rise during this phase. Beyond the near term, we expect these reflation trades to go into reverse. Stay defensive.

Sell the bounce in banks, which face a triple whammy of earnings threats. This will reduce our financials sector allocation to underweight, making room for last week's energy upgrade.