Earnings acceleration an indicator of outperformance

Earnings acceleration in global equities is a likely indicator of their ability to outperform over one and three-year periods, according to research by American Century. 

The report ‘Revisiting earnings acceleration’ examined the earnings acceleration of stocks as a source of outperformance by comparing ‘accelerating’ and ‘decelerating’ global equity portfolios. 

This consisted of an average of 822 companies categorised as ‘accelerating’ and 1,504 which were classed as ‘decelerating’ between 2Q 2002 and 4Q 2020. The best year for accelerating stocks was 2010 when there were 1,108 and the report highlighted many companies experienced earnings rebounds from distressed levels after the Global Financial Crisis. 

Since 2002, the excess returns of an ‘accelerating’ portfolio persisted through different market cycles, was linked to outperformance and could be found in each equity sector.  

While there was cyclical variance in the breadth of the acceleration portfolio, this had no impact on the level of excess returns observed. 

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The percentage of companies with earnings acceleration ranged from 5.2% of companies in the energy sector to 16.5% in financials. 

It concluded: “Stocks in the MSCI ACWI universe that demonstrate earnings acceleration tended to deliver positive excess returns on a forward one, two and three-year basis. Conversely, stocks with decelerating earnings are associated with negative excess returns across each time horizon.  

“Similarly, the stocks whose earnings accelerate at a higher pace were more likely to deliver higher excess returns, on average, over time. The positive impact of earnings acceleration on performance appears to diminish, though, as the annualized outperformance becomes marginally smaller over the longer evaluation horizon.” 

Excess returns over MSCI ACWI index