Confronted with reduced earnings visibility, market participants have probably shortened their investment horizon and stopped worrying how profits will evolve. Monetary and fiscal policy support, as well as the gap between dividend yields and bond yields, then provide the motivation for buying equities in the short run, all the more so considering that low transaction costs imply that the position can easily be closed should things turn out differently than expected.
The reaction of company boards is quite different. A blurred earnings outlook will create a reluctance to invest and increase capacity, pending better visibility about the future. Contrary to financial investments, capital formation is difficult to reverse once a project has been launched, so faced with high transaction costs companies will tend to adopt a wait-and-see attitude. While understandable at the micro level, such caution if generally adopted comes with a macro cost in terms of slower growth. This in turn can strengthen the conviction of corporate executives who have argued it is better to feel safe than sorry. However, a big difference between financial markets and companies in terms of attitude to the same sources of uncertainty cannot last forever. Either growth picks up, creating an impression of improved visibility and corporate animal spirits make a comeback or growth remains subdued and markets start to worry about the earnings outlook. Unless the Fed comes to the rescue again.
A big difference between financial markets and companies in terms of attitude to the same sources of uncertainty cannot last forever. Either growth picks up and corporate animal spirits make a comeback or growth remains subdued and investors throw in the towel unless the Fed comes to the rescue again.
