* EPS revision trends improve for 5th straight month
The European 3-month EPS Revision Ratio (ERR) rose to 0.91 in May (91 upgrades for every 100 downgrades), well above the long-run average of 0.8 and on the ‘sweet spot’ of between 0.8 and 1.0. In this range, 12-month forward equity
returns are at their highest. Improving fundamentals are supported by accelerating liquidity and macro data in Europe. Banks are showing solid gains to revisions, supporting the domestic recovery rotation (Chart 1). See pages 4-6 for details.
* European ERR ahead of Global favours European allocations
Strong earnings seasons in Europe and the US have generated improved revisions on both sides of the Atlantic, which has driven the Global 3-month ERR higher for the first time in 4 months. European ERR remains above the global average for the 3rd month, implying outperformance of European equities to come
* Gradually increasing Risk
Sector trends are generally mixed: Energy saw the greatest improvement in ERR, but the ratio itself remains poor. In contrast, Tech saw the most severe decline, but revisions continue to run above average. Mixed ERR trends are indicative of the proximity to a macro turning point in Europe. However, Financials continue to see solid improvement and stocks with the most upgrades have an average beta of 1.2. This represents a gradual shift from average beta below 1 for the past 5 months.