1. GENERAL ASSESSMENT OF THE MACROECONOMIC SITUATION
OECD ECONOMIC OUTLOOK, VOLUME 2017 ISSUE 1 © OECD 2017 – PRELIMINARY VERSION
41
in bond yields. However, the positive assessment of corporate earnings might be too optimistic given small changes in short and long-term consensus projections for GDP
growth and inflation over the past six months, pointing to risks of equity price corrections if earnings growth disappoints.
In the United States, SP500 price-to-earnings PE ratios, based on expected earnings, now significantly exceed the 30-year average. The recent increase should be
viewed in the context of very strong projected earnings growth, of around 20 in the Figure 1.21. Recent equity price gains have been driven by improved market sentiment
1. Price-to-earnings PE ratios and earnings are 12-month forward forecasts from IBES. 2. Figures represent “current ratio - historical mean standard deviation”. Current PE ratios are calculated as the mean of the last
10 days. Historical means and standard deviations are calculated based on daily data for the past 30 years. 3. Changes in GDP growth and inflation forecasts from Consensus Economics between October 2016 and April 2017. Long-term forecasts
refer to projections for the 6 to 10-year ahead average. Source: Consensus Economics; Thomson Reuters; and OECD calculations.
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2015 2016
2017 80
100 120
140 160
Index 11 Nov. 2016 = 100 11 Nov. 2016
World Emerging market economies
United States
A. Equity price developments
2015 2016
2017 80
100 120
140 160
Index 11 Nov. 2016 = 100 11 Nov. 2016
Japan Germany
France Italy
B. Equity price developments
USA JPN
DEU FRA
ITA -5
5 10
15 20
25 30
Change in earnings forecast Change in PE ratio
Change in equity price
C. Changes in PE ratio and earnings¹
Changes from 11 Nov. 2016
USA JPN
DEU FRA
-1.0 -0.5
0.0 0.5
1.0
D. Current PE ratio¹ ²
Deviations from the mean in standard deviations
USA JPN
DEU FRA
ITA -0.2
-0.1 0.0
0.1 0.2
0.3 pts
Long-term forecast Forecast for 2018
E. Changes in GDP growth forecasts³
USA JPN
DEU FRA
ITA -0.2
-0.1 0.0
0.1 0.2
0.3 pts
Long-term forecast Forecast for 2018
F. Changes in inflation forecasts³
1. GENERAL ASSESSMENT OF THE MACROECONOMIC SITUATION
OECD ECONOMIC OUTLOOK, VOLUME 2017 ISSUE 1 © OECD 2017 – PRELIMINARY VERSION
42
coming 12 months. Such high growth in expected earnings may, however, exaggerate the expected benefits of possible policy initiatives, including corporate tax cuts. The rise in a
widely-used metric of market valuation – the Shiller cyclically-adjusted PE ratio which discounts recent earnings developments – to its highest level since the dot-com boom is
also a worrying development.
8
Despite this, the increase in stock prices has been accompanied by low expected stock market volatility, as measured by the VIX index
Figure 1.22. Equity prices are vulnerable to downward revisions in earnings expectations, a
faster-than-expected rise in government bond yields and investor sentiment shifts. A big correction in equity prices could weigh on economic activity via wealth effects and the
financial conditions for firms though such effects appear to have weakened in recent years. Heightened financial market volatility could also spill over to other assets and
countries, with negative feedback loops. In the United States, perceived risks of a significant decline in SP500 equity prices one-month ahead, as measured by the SKEW
index, have recently risen to a record high Figure 1.22.
Buoyant house prices in some economies raise concerns about financial stability
An overreliance on very expansionary monetary policy in recent years, and the associated extended period of low interest rates, has led to vulnerabilities associated with
rising debt levels, elevated asset prices and a search for yield. Some advanced economies
8. The ratio has real equity prices in the numerator and trailing 10-year average real earnings in the denominator, and hence is still influenced by the earnings slump in the 200809 recession,
boosting the overall ratio.
Figure 1.22. Volatility has been low but perceptions of risks of large equity price declines have increased in the United States
20-day moving average
Note: The VIX measures an expected symmetric range of movements in the SP500 index over next 30 days. It is derived from options. The Merrill Lynch Option Volatility Estimate MOVE index is an equivalent of the VIX index for US treasuries. The Chicago Board Options
Exchange CBOE SKEW is an option-based measure of the perceived risk of 30-day ahead large two or more standard deviations changes in returns of the SP500. Numbers above 100 indicate a negative skew in the distribution i.e. negative tail risk. Since the standard
deviation varies over time, so does the size of expected equity price declines. Source: Thomson Reuters.
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2000 2002 2004 2006 2008 2010 2012 2014 2016 10
20 30
40 50
60
50 100
150 200
250 VIX-index
MOVE-index
A. Financial market volatility
