Earnings forecasts typically follow a quarterly pattern: they rise from trading day six to day 36 of the new quarter as companies release results for the recently completed quarter, often beating prior estimates for the past quarter and providing higher guidance for earnings in the quarters ahead. So far, the third quarter earnings reporting season has seen the fewest upward revisions to Wall Street analysts' earnings per share (EPS) estimates compared to the prior four quarters. Analysts have raised estimates for nearly 100 fewer companies than the average of the past four quarters and downwardly revising estimates for more than the average. While the outlook for earnings per share over the next 12 months is rising during this reporting season, it has not risen by much—the dollar amount has climbed by only 0.5% for the global companies in the MSCI World Index (this index is composed of 72% U.S. companies and the rest from developed international countries).

One reason that analysts may not be lifting their earnings estimates as readily as usual is that guidance from business leaders has turned pessimistic lately. The Purchasing Managers Indexes (PMI), a widely watched survey of business leaders that indicate how economic and earnings growth is developing, continues to show a decline in the fourth quarter for major economies like the U.S., eurozone, Japan, and the United Kingdom. The threshold between growth and contraction for the index is 50. The Manufacturing PMI for October in Europe came in at 46.0, in Japan it weakened to 49.2 from 49.7. In the United Kingdom, it slipped to 49.9 from 51.5. Even in the U.S., where there is talk of exceptionalism, the manufacturing PMI came in at 48.5, the fourth month in a row below 50. The combined global version of the index has dipped back below 50 in recent months and slid further in October.

Wall Street analysts' earnings estimates tend to follow the trend in the global PMI with a lag of about 3 months, as you can see in the chart below. When the PMI is rising above 50 analysts revise up their growth outlook, when the PMI is falling below 50 they tend to cut their estimates to account for losses. The October reading of the global manufacturing PMI was 49.4, the fifth month in a row below 50. Yet, at the same time, Wall Street analysts' estimates are for double-digit earnings growth for global companies over the coming 12 months.

It seems that something has to give: Either the PMI has to hook back up above 50 signaling solid growth or earnings estimates have to turn down sharply into an outlook for losses.

Which one gives? Despite the weaker outlook by business leaders and analysts, we think it is more likely to be the PMI moving up than earnings moving down—but it's possible both may have to give a little.

Why would the PMI be poised to rebound back above 50 in the coming months? One reason is the central bank rate cutting cycle is now well underway. Historically, there has been a lag of nine months between moves in the net number of central banks cutting rates and the PMI, as you can see in the chart below. The net number of the 18 advanced economy central banks cutting rates has moved up to 10 (the latest move was a cut for 14 while the last move was a hike for four). Historically, this has aligned with a PMI above 50.

The net 10 central banks cutting rates implies the PMI rising to 52.5 over the coming nine months. This, in turn, signals 10% earnings growth three months later which aligns with the current analysts' outlook for earnings growth over the next 12 months. Consequently, analysts' earnings estimates may need not to be revised up significantly this quarter. Instead, it is the outlook by business leaders that may be due for a boost.

Election uncertainty may have caused some businesses to be cautious, postponing, scaling down, delaying, or even cancelling some growth initiatives. That might lead to a post-election rebound in the PMI as the uncertainty fades. The Japan election last weekend may offer a lesson for investors in this regard. Japanese stocks, represented by the Nikkei 225, posted gains in the four days immediately following last Sunday's election, despite post-election headlines that read:

• "Japan plunged into political uncertainty after voters deliver dramatic defeat to longtime ruling party" – CNN
• "Japan Election: Asia's Most Stable Democracy Is Sent Into Chaos" – The New York Times
• "Japan's Stability Gets a Monster October Surprise" – Bloomberg

We believe the uncertainties brought up in those articles are accurate. However, the immediate post-election reaction in stocks was a move higher with Japanese stocks, represented by the Nikkei 225, posting gains on each of the four trading days that followed the election. More importantly, the Japan PMI preliminary reading released on October 24 came in at 49.0 and the final reading released on November 1 was a slightly higher 49.2, suggesting business sentiment may have seen a slight rise despite the October 27 election uncertainties. As we look to the U.S. election this week, just getting the election behind us may have some positive impact, no matter the policy uncertainty it could bring.

Michelle Gibley, CFA^®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.