Equity analysts have shifted to a net negative stance on US corporate earnings prospects for the first time in months, reflecting growing concerns that inflation and rising interest rates are eroding company profits. A gauge from Citigroup shows that for the first time in 23 weeks, the number of analysts cutting earnings forecasts has surpassed those raising them, ending the longest streak of upward revisions since September 2021.
More analysts are expressing pessimism about US corporate profitability. Stefan Kemper, Chief Investment Officer for Germany at BNP Paribas Wealth Management, noted that the weakness is primarily driven by the consumer sector, spanning both staples and discretionary goods, along with materials and financials. He attributed these downward revisions directly to the combined pressure of higher living costs and surging energy prices.
While Wall Street analysts broadly retain confidence in a banner year for US corporate earnings, some have raised concerns about the near-term outlook for equities. This view is gaining traction across a growing number of institutions. Helen Jewell, Chief Investment Officer for Fundamental Equities International at BlackRock, the world's largest asset manager, recently stated that market forecasts for this year's US earnings growth remain at quite elevated double-digit levels, ranging from 15% to 18%, leaving considerable room for downward adjustments. She specifically highlighted that expectations for stable consumer sector earnings are difficult to justify given current interest rate levels and the inflationary impact from Middle East tensions. In her view, improvements in energy and materials earnings will be offset by downward revisions in sectors like airlines, with overall profit growth potentially ending up roughly flat.
Beyond earnings downgrades, valuation risks are also putting strategists on alert. Michael Wilson, Chief US Equity Strategist at Morgan Stanley, warned that if equity valuations continue their recent slide and rising energy prices force tighter monetary policy, the S&P 500 could face up to 7% downside. His team further noted that the market's sensitivity to interest rates has reached its highest level in recent years, with the 10-year Treasury yield approaching the critical 4.5% threshold, making rate hikes the core risk variable hanging over the stock market.
The macroeconomic landscape offers little room for easing. The OECD projects that global inflation will run faster than previously expected by 2027, necessitating further monetary policy tightening. Meanwhile, the Federal Reserve delivered its first rate hike in three years earlier this month in response to price pressures. The combination of high inflation and elevated interest rates means corporate profit margins and equity valuations will face pressure simultaneously.
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