Conclusion: Despite sovereign debt concerns out of Europe getting most of the attention, China still leads the way when it comes to the forward outlook for global growth. With that said, continued slowing in China will not bode well for U.S. Equities – despite a hopeful 2H10 domestic earnings growth story.
We’re setting up to subtract one more point from the bullish case for U.S. equities – earnings. Perma-bulls have been touting the 2H10 EPS growth story as the lone savior for U.S. equities and it looks like that could roll over if China continues to slow.
Our proprietary Hedgeye China Index combines the Shanghai Composite, Hang Seng, and Copper – all of which are leading indicators for global growth – and is one important analytical tool we use to get a read-through on the forward global growth outlook. You’ll note that our index peaked on April 14th – nine days prior to the 4/23 cyclical peak of the S&P 500.
Since then, we’ve seen lower-lows in the Hedgeye China Index – which, much to the dismay of U.S. equity perma-bulls, happens to coincide quite nicely with 2010’s unreported S&P 500 EPS estimates. In fact, the trailing three month positive correlation between the two series is 0.95. That’s an r-squared of 0.91, which, by all statistical measures, is very significant.
Over the last three months, the unfolding of the European sovereign debt crisis has dragged down many global equity markets and the remaining bulls out there are failing to realize is that that issue is not going away any time soon. In fact, we expect a European-style sovereign debt crisis to manifest itself in the U.S. over the next 3-6 months. Combine that with our bearish outlook on U.S. housing prices and the U.S. consumer, and it’s easy to see why the 2H10 U.S. earnings growth story won’t be enough to hold firm the fading bid for U.S. equities.