Barclays equity strategy: EPS growth key to offsetting rise in bond yields

Increasing momentum in analysts' estimates for company earnings is helping to offset the pressure from rising government bond yields on shares' valuation multiples, analysts at Barclays Research said.

Not only had actual results for the fourth quarter earnings season turned out better than analysts had expected, estimates for 2021 were also being revised higher.

"We expect easy comps and strong activity to support earnings this year," they said.

"This should also add fundamental legs to the rotation to Value and Cyclicals, on top of the impact from rising yields."

Nevertheless, there was one potential fly in the ointment - corporate taxes.

Over the medium-term, higher corporate taxes could become a headwind for profit growth.

In the case of the UK, Barclays estimated that the higher 25% rate from 2023 onwards would subtract 3-6.0% from companies' earnings per share.

Regarding the fourth quarter, US EPS growth had reached 6%, instead of by 7% as had been anticipated, while in Europe profits had dropped by 14%, less than half the 30% decline expected.

And while the I/B/E/S consensus for European EPS growth of 34% in 2021 "looks high", momentum and revisions are positive because macroeconomic forecasts are being revised upwards.

"While rising yields have been a key driver of equity markets ytd, sector performance looks broadly consistent with EPS revisions.

"Materials, Energy, Financials, Transport and Autos are seeing the biggest upgrades, while most Defensives lag."