Stock markets expected to be under 4% annual growth

By MoneyTimes

Aug 04, 2015 03:54 AM EDT

The slowdown in economic growth in major economies is expected to keep the stock markets under four percent annual growth in the near future. The second half of 2015 is expected to be sluggish following the bleak economy outlook for the US, EU and China.

With lowering of growth forecast for the US for 2015 by International Monetary Fund (IMF), the Wall Street is expected to reel under pressure. Adding to this, the world's second-largest economy, China is also struggling with a slowdown in its economic growth.

On the other hand, Greece turmoil continues to impact the European Union (EU). Considering all these factors, the stock markets' annual growth may not surpass 4% or not even 3.5% after adjusting with inflation rate.

On the other hand, the oil price drop is impacting energy stocks that have significant influence on global market indices.

During the first of half of 2015, The Dow Jones Industrial Average slipped over two percent while Nasdaq Composite added 4.38%.

The bleak performance of manufacturing, materials and other cyclical had kept the market under pressure. Technology, biotech, healthcare and real estate segments supported the market. Hence, Nasdaq rose over four percent.

It's not that easy for stock markets to witness four percent growth even in case of six percent GDP growth rate. The reason is simple- the correlation between economic growth rate and corporate sales growth.

Future earning of corporate can't be larger than sales growth. the higher the profit margins, the more attractive the dividends. When profit margins are under pressure, corporate can't announce attractive dividends that will boost market sentiment.

A sluggish economy would result in a slowdown in sales growth and this will translate into pressure on profit margins, discouraging higher dividends. This cycle would make four percent growth near impossible for world stock markets after adjusting inflation rate. 

World economies barring China and one or two countries are struggling to register real growth of over three per cent ever since the economy crisis triggered in 2008. Sales growth is linked to economy development. When economy development is sluggish, sales growth would also be under pressure. So one can't expect encouraging upward movement in the stock markets when corporate sales under pressure. 

IMF in July lowered its projection for global economic growth for 2015 from 3.5% to 3.3%. IMF attributed the reason for this to sluggishness in the world's largest economy.

Europe's growth is expected to be stable and speedy recovery is anticipated for Germany, France, Italy and Spain while the crisis in Greece economy would continue to add to market volatility. 

Growth projection for China is 6.8% for 2015 and 6.3% for 2016. IMF revised down its forecast for Japan economy growth by 0.2 points to 0.8% for 2015.

The Russian economy is expected to slow down further to witness 0.2% growth in 2016. Oil exporting countries from Latin America are suffering sluggishness in their economies as GDP growth is reeling under severe pressure following the drop in global oil prices. 

Considering all these growth projections, the stock markets growth is expected to be under four percent after adjusting inflation rate.

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