Thursday, March 5, 2015

ECB Asset Purchases = (Big) Equity Decline?

We have commented quite a bit on the dismal revisions to sales and earnings estimates (see here, here, and here for just a few examples).  As we have noted, European stocks have excelled in the downgrade department, led by the Energy sector:

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Keeping in mind that changes in estimates have remained in the top 10 important factors driving performance for MSCI Europe over the past year...

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...as well as the close relationship between those estimates and movements in the EUR...

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...it is a bit disconcerting to watch as the EURUSD exchange rate flirts with a decisive breakdown below long-term support:

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Furthermore, investors seem to have taken notice of the fairly extended nature of the market, as evidenced by a sharp drop (to ~40% from ~70% a month prior) in the percentage of companies trading at a premium to longer-term valuation metrics.

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All of this would seem to lend support to the relationship we showed between ECB asset purchases and stock performance a while back-- namely that MSCI Europe looks vulnerable to a 35% decline from current levels:

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