Most countries have released August industrial output data. The “global” measure tracked here, covering the G7 economies and seven large emerging economies, is estimated to have risen by a further 0.9% on the month, implying that more than 90% of the 18.0% fall between December 2019 and April 2020 has now been retraced – see first chart. An additional increase of 1.7% is needed to regain the peak and is likely to be delivered by October. If so, the round trip in output back to the peak will have occurred four times faster than in the GFC recession / recovery, i.e. in 10 versus 41 months (February 2008-July 2011).

Retail sales had already surpassed the prior peak in June and rose to a new record in August.

Strong growth of industrial output and retail sales over the summer occurred despite a significant rise in G7 plus E7 new covid cases, which have slowed recently as falls in Brazil and India have balanced pick-ups in Europe and the US. The latter are disrupting recoveries in certain service activities but pose little threat to industrial output / goods demand strength.

Equity market earnings are geared to industrial output rather than GDP. A likely return of global output to the peak suggests the same for global earnings per share. The consensus forecast based on bottom-up analyst estimates has recovered but appears to have considerable further upside – second chart.

Does this imply additional strength in equities? Not necessarily. The forward earnings estimate has risen in 238 months since 1988 but the MSCI All-Country World Index in US dollars rose in only 162 of those months, i.e. 68% of cases. There were, in other words, 76 months in which a derating of the market offset a rise in forward earnings.

In 36 of these 76 months, the derating was associated with a rise in real government bond yields. September 2020 was a case in point: equities ended the month lower, despite a rise in forward earnings, as real TIPS yields edged higher – third chart.

A further rise in real yields as global “excess” money is absorbed by economic growth could cap equity market upside despite favourable earnings revisions. Such a scenario offers the best hope of a sector rotation in favour of cyclical value (financials, energy) at the expense of long duration cyclical growth (IT, communication services). September estimates of global narrow and broad money measures will be available later thls week, allowing an updated assessment of current excess money trends.