The upcoming corporate earnings season could prompt another sharp fall in global share prices with profit forecasts looking far too upbeat given mounting recession risks, investors and analysts warn.
After shedding more than $20 trillion in value since hitting record highs in January, world stocks are stuck in a bear market as major central banks struggle to stem surging inflation without derailing fledgling growth.
Valuations have fallen below historical averages, which might tempt bargain hunters. However, recent profit warnings from U.S. retailers Target TGT.N and WalMart WMT.N and pandemic winners like Zalando ZALG.DE and B&M BMEB.L have traders worried about a series of downgrades, as spiralling energy and other input costs bite and consumers cut spending.
Emmanuel Cau, a strategist at Barclays, said earnings were “taking over from valuations as the next market driver”.
According to the British bank, equity markets may struggle to find a bottom until profit forecasts are reset lower. That’s because high profit expectations “optically deflate” company valuations to levels which can mislead investors.
“There have been very few downward revisions of corporate earnings, there’s still too much optimism. That’s why we expect another correction when earnings are published and with this volatility, one really risks taking a beating,” said Francesco Cudrano, advisor at Simplify Partners.
He said his firm had been cutting equity exposure and boosting cash in anticipation of a 15-20% market decline. JP Morgan kicks off U.S. earnings on Thursday, with the season in Europe starting the following week.