Analysts forecast new peak for FTSE 100 profits in 2019

The FTSE 100 is currently doing a good job of confounding the Cassandras, naysayers and pessimists with a capital gain of around 6% in 2019 to date, despite the ongoing uncertainty over global tariff and trade policies, Brexit and gathering concerns over the globe’s economic growth prospects.

The index’s advance may be the result of its valuation, since a forward price/earnings ratio of 12.5 times and a prospective dividend yield of 4.7% look attractive, both in absolute terms and also relative to the other geographic options available to advisers and clients.

Such relatively lowly multiples could suggest that a lot of bad news is already in the price, especially after the second-half slump in the index last year. After a marked period of underperformance which stretches back to the summer 2016 referendum vote on EU membership, UK equities look unloved and may therefore be undervalued.

The question now is what could trigger fresh interest in the FTSE 100 and other UK stock benchmarks. Some form of resolution to the Brexit negotiations impasse is one possibility, because advisers and clients would then at least be able to make a rational decision as to whether the circumstances they now face – good deal, bad deal or no deal, depending upon their point of view – is already factored into valuations or not.

Further back-tracking by central banks around the world with regard to monetary policy could also help, should they decide to keep interest rates (even) lower for (even) longer – although such a move could prompt investors to ask why they would feel the need to do this and perhaps raise more questions than it would offer answers.

The best catalyst of all would come in the fundamental form of positive momentum in both earnings and dividend forecasts.

Profit uplift

The good news is that analysts are, in aggregate, expecting the FTSE 100 to generate an all-time high pre-tax profit of £223 billion in 2019. That is a 13% increase on 2018 and finally takes the index past the £202 billion peak of 2011, when over £100 billion in pre-tax profit came from the then-buoyant mining and oil sectors alone.

FTSE 100 is expected to pass 2011’s profits peak in 2019

Source: Company accounts, Sharecast, consensus analysts’ forecasts for 2019 and 2020

In 2019, oils and miners are forecast to churn out £74 billion in profit, so the base of the FTSE 100’s earnings power seems more broadly based, which should be a good thing.

Financials – and the banks in particular – and consumer staples stocks such as Diageo and Unilever – are also expected to make sizeable profit contributions.

FTSE 100’s earnings base is broader than it was in 2011, when commodities plays dominated

Source: Sharecast, analysts’ consensus pre-tax profit forecasts, company accounts

The decreased reliance on the commodity producers, where prices, and therefore profits, are difficult to predict, is also welcome, although advisers and clients will need to keep an eye on the contribution to profits (and profits growth) from the financials, where the banks will have a key role to play.

Analysts expect the Big Five banks – Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered – to increase profits in 2019 for the third time in a row and finally exceed 2007’s previous profits peak, at the end of the last credit, stock market and economic boom.

Shift in momentum

The potential snag is that we have been here before. Analysts have predicted a new aggregate peak in profits from the banks for the past several years but that 2007 high of £35.8 billion has remained tantalisingly out of reach.

Banks will have a big influence on the FTSE 100’s earnings power

Source: Company accounts, Sharecast, consensus analysts’ forecasts

There remains the risk that a final raft of PPI claims before the autumn deadline proves an obstacles to reaching and passing that 2007 number, while the banks must also continue to invest heavily in IT and digitisation to reassure customers over cyber-security and also fend off the threat posed by challenger banks and new, fintech rivals. Competition to win deposits and offer mortgages has started to weigh on net interest margins in the UK for good measure and neither HSBC nor Standard Chartered will want to see too much of an economic slowdown in either China or Hong Kong, so dangers to the rosy profit scenario do still lurk.

And for all of the bullish outlook on profits for 2019, the less good news is that analysts have stopped upgrading their forecasts.

Positive earnings momentum helped to carry the FTSE 100 through the first half of the year, as analysts upgraded their profit forecasts and the index peaked on a closing basis at 7,877 in May, but the rate of increases slowed in the third quarter and came to a grinding halt in the fourth.

Nor has 2019 seen any profit upgrades either. In fact, in aggregate, analysts’ earnings forecasts for the FTSE 100’s members have dropped by 7% so far this year, to £223 billion from £242 billion at the end of last year.

Analysts have stopped upgrading their profit forecasts for 2019

Source: Company accounts, Sharecast, consensus analysts’ forecasts

The pound’s rise against the dollar and the euro will be having a major impact here, as this will decrease the value of overseas profits once they are translated back into pounds.

And given concerns over the growth outlook in the EU, China and the USA (let alone that of the UK, as the Brexit negotiations drag on) it is easy to pick holes in analysts’ forecasts for 13% pre-tax profit growth in 2019.

Yet this may already be reflected in the index’s lowly valuation, which takes us back to whether the UK represents contrarian value or not and with 25 FTSE 100 members trading on less than 10 times forward earnings or less, it is tempting to think that the gloom may just be a little overdone and that even meeting, let alone beating, earnings forecasts could be enough to convince the doubters to return to UK stocks. After all, the index stands some 10% below its prior all-time high, even if profits are forecast to reach a new peak this year.

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.