Diverging earnings forecasts signal bumpier road ahead for stocks

Wed Feb 4, 2015 10:37am EST
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By Lionel Laurent

LONDON (Reuters) - Waves of cheap money from central banks have shielded stocks from the volatility besetting currency and commodity markets, but increasing disparities in company earnings forecasts suggest that could soon change.

Analyst forecasts for European and U.S. companies have reached levels of dispersion not seen since 2010 and 2011 respectively, according to Thomson Reuters data, at a time when stock market volatility as tracked by the U.S. VIX and European VSTOXX indexes is closer to 2012 levels.

The higher the dispersion, the more spread out the numbers.

So on both sides of the Atlantic, corporate earnings expectations are no longer as benign as the market whose multi-year rallies they have underpinned, in a world where eye-popping moves in - for instance - the price of crude oil and the Swiss franc have hit firms in ways that are sometimes hard to predict.

Rock-bottom interest rates and central bank stimulus measures have cushioned stock markets against volatility, so potentially nasty surprises from company earnings may be a catalyst for even bigger trading swings.

"We have become used to relatively low volatility... Now we are getting into a slightly 'noisier' stage of the economic cycle," said Nick Nelson, a strategist at UBS, who said knock-on effects on companies from volatile currencies would feed through to the stock market.

"There is going to be an increasing spread of analyst views... The gap between (corporate) winners and losers is getting larger."

(Earnings estimate dispersion in Europe: link.reuters.com/gut34s   Continued...

A trader works on the floor of the New York Stock Exchange February 3, 2015. REUTERS/Brendan McDermid