After the worst first half for US stocks in decades, a sharp rebound over the past week has prompted some optimism that the worst sell-off may be behind us – but not everyone is convinced. It may not come as a surprise that market watchers are hesitant to call the bottom of the brutal sell-off, but there is one indicator that many strategists consider crucial: earnings revisions. Trevor Greetham, head of multi-asset at Royal London Asset Management, says there is an “earnings recession” at hand which he expects to last “quite a long time”. “Profits are the next problem… This rally could last a little longer, but don’t think this is the end of the bear market,” CNBC’s “Squawk Box Europe” said Monday. Morgan Stanley is also keeping a close eye on earnings revisions. “Equities markets tend to bottom 2-3 weeks before the bottom of earnings revisions, which have not even turned negative,” noted Morgan Stanley’s European strategists, led by Graham Secker, on Monday. In a separate note on US equities, the bank noted that the S&P 500’s rally over the past week was due to rising valuations – an “unusual” phenomenon amid growing concerns about earnings. “Falling yields and lower oil prices have lowered the final rate for the Fed. Whether this is bullish or bearish is up to one’s interpretation. Last week the market took the bullish view that could last for a few more weeks before the reality of lower earnings hits and the bear market continues,” said strategist Michael Wilson. Read more As recession fears mount, UBS delves into history books to predict what could happen These global stocks appear to be oversold – and analysts expect a rebound The MSCI Europe may be in the later stages of a rating downgrade, the peak-to-trough decline still seems reasonable compared to previous downturns The reason for this is that earnings estimates have continued to rise since the beginning of the year, despite the sharp drop in share prices, Secker explained. which should exert downward pressure [gross domestic product] and [earnings per share] forecasts,” he added. How low can earnings go? In a note titled “Earnings: How low can they go?”, UBS also emphasizes the importance of earnings, although taking a slightly more optimistic tone. “With the S &P 500 P/E down [around] 6x YTD how much earnings will fall is an important debate,” wrote the bank’s strategists led by Keith Parker last week. They added that their baseline case for US stock is “slower growth but no recession” of $235.50 and $250 for the S&P 500 for 2022 and 2023, respectively, which they believe are “attainable.” This compares to $186.60 in 2021, according to FactSet data. However, strategists stressed that “risks remain on the downside.” The bank has an “EPS implied change indicator” that remains positive and points to further appreciation. Energy, Utilities and REITs have the highest implied EPS revisions at sector level, while Transport and Banks lead IGs [investment grade]’ the analysts wrote. The bank said its indicator has been a “helpful signal” during periods of market weakness and earnings downgrades, including the stock market crash of 2008-2009.
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