Corporate earnings expectations in the United States are experiencing their first reversal in months. Rising inflationary pressures and higher interest rates are eating into profit outlooks, prompting a pullback in the optimism that has dominated Wall Street analysts.
According to a Citigroup index, the number of analysts cutting earnings estimates now exceeds those raising them, ending a 23-week streak of upward revisions—the longest run of earnings upgrades since September 2021.
Stephan Kemper, Chief Investment Officer at BNP Paribas Wealth Management Germany, attributes these downward adjustments to the combined impact of escalating living costs and rising energy prices. The most affected areas span consumer staples, consumer discretionary, materials, and financial sectors. Meanwhile, the Organisation for Economic Co-operation and Development (OECD) issued a report this Wednesday warning that global inflation will outpace previous projections by 2027, signaling that the pressure for tighter monetary policy is here to stay.
Analyst Outlook Shifts Direction
Based on the index tracked by Citigroup, analysts downgrading US corporate earnings expectations have outpaced upgrades for the first time in 23 weeks, declaring an end to the longest upward revision cycle since September 2021.
"The main drivers of weakness are coming from the consumer side, both in staples and discretionary sectors, along with materials and financials," Kemper said. "I believe these downgrades can be directly linked to higher living costs and rising energy prices."
It is worth noting that Wall Street analysts overall still maintain a positive outlook on US corporate earnings performance for this year, generally expecting substantial profits.
Valuation Pressures Mount as Monetary Tightening Risks Rise
The downward revision in earnings expectations, combined with multiple macroeconomic headwinds, is weighing on the stock market. Morgan Stanley strategist Michael Wilson warned earlier this week that if equity valuations continue their recent decline and rising energy prices push monetary policy toward further tightening, the S&P 500 faces a risk of dropping by as much as 7%.
The Federal Reserve raised US interest rates earlier this month—the first hike in three years—to combat inflationary pressures. The OECD's report this Wednesday further reinforced expectations of a sustained tightening path. The organization believes global inflation will accelerate faster than previously forecast by 2027, suggesting major central banks will still need to maintain a relatively restrictive monetary policy stance at that time.
For investors, the combination of downward earnings revisions and rising interest rates means the valuation logic for equities faces a dual challenge: the numerator (corporate profits) is under pressure, while the denominator (discount rate) is climbing. The risk of short-term market corrections should not be underestimated.
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