(Bloomberg) - While investors have been fixating on inflation and rate hike fears, the true signs of trouble lie in earnings growth outlooks, according to JPMorgan Chase & Co. quantitative strategists.
“Global profit forecasts have been slowing for a number of months” and global earnings data are now “in net downgrade territory,” quant and derivatives strategists led by Khuram Chaudhry wrote in a note to clients. “Our reading of the earnings cycle, and its drivers, suggests that the slowdown is indicating that inflation may have peaked and bond yields may have exhausted themselves.”
Global stock markets have slumped this year, following a ferocious rally that catapulted major indexes in Europe and the U.S. to successive record highs. Much of the malaise has been attributed to soaring input costs due to record inflation, and rising bond yields, as central banks across the developed world raise rates to regain control of runaway prices.
This narrative may now be outdated, according to JPMorgan strategists. Instead, the increasingly gloomy earnings outlook and indicators such as orders to inventories suggest a looming slowdown of the economy, which may not allow the Federal Reserve to hike rates as much as the market currently fears. Traders are now fully pricing the Fed will increase rates by half a percentage point at its next three decisions.
JPMorgan strategists said investment opportunities are now moving away from cheaper, so-called value stocks, and toward quality and once bond yields move lower, growth stocks can outperform again.
“Investors should note that history frequently suggests market post negative returns when the upgrade cycle swings to downgrade territory, and stock, style and sector rotation typically becomes very defensive,” they said.
By Nikos Chrysoloras
