The corporate earnings season currently underway in China has been disappointing. Admittedly, the Q3 results published so far point to a slight improvement in year-on-year growth in earnings per share of domestically-listed firms. But the recovery was more lacklustre than analysts had anticipated and, as a result, downward revisions to full-year earnings estimates have outnumbered upward revisions in recent weeks. Despite these adjustments, consensus earnings forecasts for the next few quarters still look very optimistic and won’t be achieved without a strong rebound in nominal GDP growth. In contrast, we think economic growth is set to slow further. This may not have an immediate impact on equity performance, which in the short run is mostly driven by changes to P/E ratios. But if earnings do continue to disappoint, then a stock market sell-off appears likely.
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