Investors fear earnings season will spark new equities selloff

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 US retailers Target and WalMart and pandemic winners like Zalando and B&M 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 per cent market decline. JP Morgan kicks off US earnings on Thursday, with the season in Europe starting the following week.

“Negative pre-announcements could occur now at any time. Revenues and margins are both at risk,” said Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald.

“We don’t see a scenario where the Fed is able to take its foot off the breaks for at least four months even as growth is weakening and even if equities move sharply lower,” he added, referring to the US Federal Reserve’s current interest rate-hiking cycle.