20210726-Credit_Suisse-Thinking_about_2022_earnings_Reasons_to_be_cheerful_27页_892kb

Global Equity Strategy Summary

Core Content

This document outlines the outlook for US and European equity earnings in 2022, emphasizing the shift from a recovery phase to a mid-cycle stage where earnings growth becomes the key driver of returns. It also discusses the potential for higher-than-expected EPS growth due to factors such as revenue expansion, margin resilience, and tax considerations.

Main Points

1. Earnings as the Key Driver in Mid-Cycle

• Markets are progressing into a mid-cycle phase where earnings growth becomes the primary factor for returns.
• The US P/E multiple is at the top end of its historical range, suggesting limited valuation upside.
• A two-factor model using TIPS yields and credit spreads indicates a 6% upside to the P/E, but this is reduced to -1% when incorporating yield forecasts.
• The consensus EPS growth for 2022 is expected to be 11.5% to $210, but Credit Suisse forecasts 13% growth to $225 for the US and 14% for Europe, both above the consensus.

2. Revenue Growth Expectations

• Revenue growth is closely correlated with GDP growth, with a beta of around 2.
• Current consensus revenue growth is at 6%, but Credit Suisse believes it should be closer to 9%, suggesting a potential overestimation of GDP growth decline.
• The US economy is expected to outperform GDP forecasts due to the normalization of supply-side constraints and the potential for increased consumer spending from excess savings.

3. Margin Resilience

• Net margins are expected to rise to an all-time high of 13.5%, but this is partly due to tax and interest cost reductions.
• Excluding tech, EBITDA margins are in the middle of their historical range, indicating that the margin improvement is not overextended.
• The relationship between PPI inflation and CPI inflation suggests that margins have historically risen when PPI outperforms CPI.

4. Tax Considerations

• A rise in the statutory tax rate from 21% to 28% could reduce EPS growth by 6-7 percentage points, but Credit Suisse believes this is unlikely to materialize significantly.
• The Global Minimum Corporate Tax rate is expected to raise $150bn, or about 3% of global profits, but the market tends to overestimate its impact.
• Credit Suisse assumes a 13% EPS growth for the US and 14% for Europe, which is 1.5% above consensus.

Key Information

Revenue Growth

• US revenue growth is expected to be around 9%, not 6%, due to higher GDP growth and normalization of supply constraints.
• Excess household savings account for 12% of GDP, and the wealth effect from equity and housing markets is expected to boost demand.
• The US economy is projected to benefit from a significant drawdown of excess savings, potentially boosting GDP by 9%.

Margin Outlook

• Net margins are expected to rise to 13.5%, driven by tax and interest rate changes.
• EBITDA margins excluding tech are not extended and are within their historical range.
• The true unemployment rate is around 8%, which is expected to reduce wage growth pressure once unemployment benefits expire in September.

Tax Impact

• A tax rate increase is unlikely to be a major drag on earnings, as firms have mitigation strategies.
• The impact of higher taxation on earnings is often overestimated by the market.

GDP Growth

• US GDP growth is expected to be above consensus, with a forecast of 4.1% (median) and the potential for higher growth due to excess savings and fiscal policies.
• Fiscal tightening is likely to be less than anticipated, with private sector dissaving offsetting public sector tightening.

Supporting Factors

• Supply Constraints: Expected to be temporary, with corporate investment likely to increase.
• Labor Market: Unemployment is high, but wage growth is expected to be temporary.
• Consumer Behavior: Consumers are inclined to spend now due to inflation expectations and wealth effects.
• Vaccination Rates: High vaccination rates in many countries are expected to reduce the impact of the Delta variant on economic activity.
• Fiscal Policy: A $3.5–4trn fiscal package is likely to be passed, though the timing is uncertain.

Key Charts (Summary)

• Figure 1: Mid-cycle, earnings become the key driver of returns.
• Figure 2: US revenue forecasts seem low given GDP forecasts.
• Figure 4: Ex tech, margins are not extended.
• Figure 3: GDP forecasts could rise further.
• Figure 5: Tax has made a key contribution to margins.
• Figure 13: Sales consensus expectations seem a little below their usual relationship with nominal GDP growth.
• Figure 14: Consensus for 2022 real GDP growth in the US has been moving higher.
• Figure 19: On consensus forecasts, the US economy is set to operate above capacity.
• Figure 25: Consumer expectations of inflation are rising, implying savings should be spent sooner.
• Figure 37: US margins have risen in all but 1 sector YTD.
• Figure 38: There is a growing gap between top-down and bottom-up margins.
• Figure 40: EBITDA margins are only in the middle of their historical range on an ex tech basis.
• Figure 41: The decline in corporate yields is consistent with the interest charge declining, not rising.
• Figure 42: Tax has been the major contributor to the improvement in RoE over the past decade.

Conclusion

Credit Suisse remains structurally positive on equities for 2022, despite near-term consolidation risks. The combination of higher-than-expected revenue growth, margin resilience, and limited tax impact supports a more optimistic EPS growth forecast than the current consensus. The transition from an abnormal recovery phase to a mid-cycle environment is expected to be driven by earnings rather than valuation multiples, making 2022 a critical year for return expectations.