Leaning selectively against the wind
Most asset market returns can be distilled down to two basic elements: movements in cash flows and discount rates. In the past month or so, for risky assets such as equities, each has moved in a broadly friendly direction. Expectations around earnings, which are the dominant source of cash flows for equity investors, bottomed for global stocks in mid-May, and as the earnings season progressed, so did analyst optimism on the path of future earnings. Notwithstanding the savage fall in delivered earnings in the second quarter, future expected earnings for the MSCI All Country World Index have moved such that by the end of next year, earnings are now expected to be a whisker above where they were last December.