MILAN: The next corporate earnings season could lead to another sharp drop in global stock prices, with earnings forecasts looking far too optimistic given growing recession risks, investors and analysts warn.
After losing more than $20 trillion in value since hitting record highs in January, global stocks are stuck in a bear market as major central banks struggle to stem soaring inflation without doing derail nascent growth.
Valuations have fallen below historical averages, which could tempt bargain hunters. However, recent profit warnings from U.S. retailers Target and WalMart and pandemic winners like Zalando and B&M have traders worried about a series of downgrades, as the cost of energy and other inputs spirals was biting and consumers were cutting back on their spending.
Emmanuel Cau, strategist at Barclays, said earnings were “taking over from valuations as the next market driver”.
According to the British bank, stock markets could struggle to find a bottom until earnings forecasts are revised downwards. In effect, high earnings expectations “optically deflate” corporate valuations to levels that can mislead investors.
“There have been very few downward revisions to corporate earnings, there is still too much optimism. That is why we expect another correction on the earnings release and with this volatility, we risk really take a beating,” said Francesco Cudrano, adviser at Simplify Partners.
He said his company had reduced its exposure to stocks and increased its cash in anticipation of a 15-20% decline in the market. JP Morgan kicks off US results on Thursday, with the European season starting the following week.
“Negative advance announcements could occur at any time. Both revenue and margins are at risk,” said Eric Johnston, head of equity derivatives and cross assets at Cantor Fitzgerald.
“We don’t see a scenario in which the Fed would be able to ease off for at least four months even as growth weakens and even though stocks fall sharply,” he added, referring to the current interest of the US Federal Reserve. rate hike cycle.
The likelihood of global corporate earnings being higher a year from now has fallen to 37%, the lowest figure since late 2015, according to Absolute Strategy Research, which surveyed investors managing $5.2 trillion in assets on their expectations.
The same survey found a record 53% chance that investment returns on equities will outweigh bonds over the next 12 months.
Chart: Probability of Higher Earnings – ASR Survey, https://fingfx.thomsonreuters.com/gfx/mkt/xmpjowajovr/Probabilityper cent20ofper cent20higherper cent20earningsper cent20 percent20ASR.PNG
Economists have raised recession risks in the United States and Europe, citing aggressive interest rate hikes and the war in Ukraine, but earnings forecasts for this year have continued to rise since January.
According to Refinitiv, profits in Europe are expected to rise 15.2% in 2022 and 4.1% next year while in the United States they are expected to climb 10.8% and 9.1% respectively.
Barclays sees an 8% drop for the European STOXX 600 index to 380 points. US Bank Wealth Management raised its year-end forecast for the S&P 500 by 16% to 4,050 points.
The MSCI AC World Index is trading at 14.3 times forward earnings, about 11% below the 20-year average. This, however, does not reflect any negative earnings revisions that may occur in the coming months.
“A sharp drop in real income, deteriorating global activity, protracted war and uncertainty are all cause for concern,” said Michele Morganti, senior strategist at Generali Investments, forecasting possible cuts to forecasts of profits for the second half of 2022 and 2023.
Chart: MSCI AC World price and PE, https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrmxjovm/MSCIper cent20ACper cent20Worldper cent20priceper cent20andper cent20PE.PNG