Market analysts and investors have warned that there could be another sharp sell-off in the global equities market because of the upcoming earnings season of companies. This is because profit forecasts appear to be a bit too upbeat, particularly in light of the rising risks of an economic recession.

Bear market for world stocks

In January, world stock markets had hit record highs, but they have shed almost $20 trillion of their value since then. They are now stuck in a bear market, with most of the major central banks grappling to put a stop to the soaring inflation without dipping the economy into recession.

Stock valuations have gone below historical averages, which could be attractive for bargain hunters. However, traders have now become worried about several downgrades, as consumers have cut spending, and energy and other input costs are also spiraling. This is evidenced by the recent profit warnings from pandemic winners, such as B&M and Zalando, and US retailers, such as Walmart and Target. Market analysts said that earnings would now become the market driver instead of valuations.

Profit forecasts should be lower

According to experts, it may become difficult for stock markets to reach a bottom unless there are lower profit forecasts. This is because company valuations become deflated because of high-profit expectations and they reach levels that could actually mislead investors.

Market analysts said that downward revisions of corporate earnings had been too few because the markets are still quite optimistic. Therefore, there will be another correction to this volatility when companies publish their earnings. This means that the equity markets could be in for yet another beating. The US earnings season will kick off on Thursday with JP Morgan, while Europe’s earnings season will begin next week.

Experts said that negative pre-announcements could be seen at any time, as margins and revenues are now at risk. They said that even with weakening growth, it does not seem likely that the Federal Reserve will be able to pull back from monetary policy tightening for at least four months.

Survey results

A recent survey from Absolute Strategy Research showed that there was a 37% probability that global corporate earnings could go higher in over a year. This is the lowest reading seen since 2015. According to the same survey, there is a 53% probability that the next 12 months will see bonds go down against investment returns on stocks.

Economists have already hiked up the odds of a recession in Europe and the United States. This is because of the aggressive hike in the interest rates and the ongoing Russia and Ukraine war. Despite this situation, there has been a rise in earnings forecasts since January.

Statistics show that earnings are expected to increase by 15.2% this year and 4.1% next year in Europe, while they would increase by 10.8% and 9.1% in the US, respectively. Analysts have also predicted benchmark stock indexes in US and Europe to decline for the year.

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