by Danilo Masoni and Medha Singh
MILAN (Reuters) – The upcoming earnings season could spark another sharp drop in equities globally as earnings forecasts look far too optimistic amid rising recession risk, many warn managers and analysts.
Global equities have already seen their overall value tumble by more than $20 trillion (€19.8 trillion) since their peaks in early January and valuations have fallen below their historical average, which should in principle tempt buyers. cheaply.
But the profit warnings issued in recent weeks by the American distributors Target and WalMart as well as by groups which had taken full advantage of the pandemic, such as the German brand Zalando or the British B&M, have revived fears of a lasting deterioration in the consumption.
For Emmanuel Cau, Barclays strategist, financial results will thus become “the next engine for the markets” after valuations.
The British bank therefore believes that the equity markets may have difficulty finding their low point as long as profit forecasts are revised downwards.
However, notes Francesco Cudrano, adviser to Simplify Partners, “there have been very few downward revisions to corporate earnings, there is still too much optimism”.
“That’s why we expect a further correction when the results are published and with this volatility, it could really hurt,” he adds.
He specifies that Simplify reduced its exposure to equities in favor of cash in anticipation of a 15% to 20% drop in prices.
US banks will kick off quarterly season on Wall Street at the end of next week and publications will begin the following week in Europe.
“Negative pre-announcements can occur at any time now. Both turnover and margins are threatened,” said Eric Johnston, director of equity derivatives and multi-asset at Cantor Fitzgerald.
“We don’t have a scenario in which the Fed would be able to slow down for at least four months, even if growth deteriorates and even if equities fall,” he adds in reference to the recovery cycle. interest rates set by the Federal Reserve.
The estimated probability of global earnings growth within a year has fallen to 37%, its lowest level since the end of 2015, according to Absolute Strategy Research, which surveyed investors managing a total of $5.2 trillion in assets.
According to the same survey, the probability that equities will provide a better return than bonds over the next 12 months has fallen to 53%, its all-time low.
While economists have regularly raised the risk of a recession in the United States and Europe, earnings forecasts for this year have continued to rise since January.
According to Refinitiv, profits in Europe should thus grow by 15.2% over the whole of 2022 and by 4.1% in 2023, while in the United States, the increase should be 10.8% this year and 9.1% next year.
Barclays expects the European Stoxx 600 index to fall 8% to 380 points and US Bank Wealth Management reduced its target for the Standard & Poor’s 500 by 16% at the end of the year, to 4,050 points.
The MSCI AC World Index is currently valued at 14.3 times expected earnings, around 11% below its 20-year average. But this level does not include any downward revisions to earnings estimates.
“A sharp fall in real income, a deterioration in activity on a global scale, a prolongation of the war and uncertainty are all reasons to be worried,” explains Michele Morganti, senior strategist at Generali Investments, who expects downward revisions to earnings forecasts for the second half of this year and for 2023.
(Report Danilo Masoni and Medha Singh, French version Marc Angrand)