Analysts See Near-Term Downside Risk for Stocks

© Reuters. Analysts See Near-term Downside Risk for Stocks

By Senad Karaahmetovic

Berenberg strategists Edward Abbott and Jonathan Stubbs see a growing risk that may facilitate the next leg lower in the U.S. stock market.

While the recent struggles have been attributed to inflation, tightening, and geopolitical risks, Wall Street analysts are growing more vocal about the earnings estimates cuts that are likely coming.

“Our 12-month forward EPS net upgrade analysis also indicates the S&P 500 and FTSE 350 are close to entering net downgrade territory for only the fourth time in the past 35 years. Analyst estimates are moderating and we expect this to continue over the coming months,” analysts wrote in a client note.

Abbott and Stubbs pay special attention to margin compression that is likely coming. They see a 15-20% drop in earnings on a YoY basis.

“Analysis of previous earnings cycles going back to the 1970s suggests equity markets trough 75% of the way through the earnings downturn (global data). Given our view that we are still early in a likely prolonged earnings downturn, we think it is too early to take unhedged upside equity market risk.”

Net-net, Berenberg analysts urge investors to focus on portfolios that “combine resilient earnings with a secure yield pick-up over the market.”

While Goldman Sachs strategist Cecilia Mariotti says that the current rally in stocks could be further underpinned by a new increase in positioning in the near term, the analyst also sees mounting downside risks.

“Without clear signs of a positive shift in macro momentum, temporary re-risking could actually increase risks of another leg lower in the market rather than signal the end of the bear market. This is particularly the case if the positive shift is driven by the systematic community and not by fundamental investors,” Mariotti wrote in a client note.

Mariotti is also worried that the market still hasn’t seen the “true” through in positioning.

“We think the path from here is likely to become more dependent on macroeconomic data,” the GS strategist concluded.