A Recession And A Wave Of Earnings Downgrades Are Coming That Will Rattle Markets
Why More Market Volatility Is Expected
One of the great lagging indicators, “sell-side” analyst earnings estimates, has started to be reduced in a trend that will accelerate as the effects of central bank interest rate increases take hold.
The “sell-side” has a vested interest to remain optimistic as long as possible because it is their business to sell deals and broker transactions to the “buy-side.” This fact of life was learned very early in my career as a money manager.
The goal of central banks in increasing interest rates is to provoke a recession that will diminish demand and cool inflation. This approach has been used with varying levels of success against demand-driven inflations. Whether this is the correct approach to address the current supply-driven inflation is debatable.
We can probably expect a recession, and a sharp one, to become evident before too long. As the evidence of recession become apparent, the pace of earnings downgrades will accelerate.
As earnings downgrades gather pace investor sentiment will erode which will put downward pressure on stock indices. The peak in earnings downgrades may coincide with a peak in investor bearishness that will produce the next attractive buying opportunity in equities.
The accompanying chart below demonstrates that while a trend of estimate cuts has commenced it has much further to travel before a level that produces a market bottom.
We remain of the view that the 2020s will be characterized by unusually high market volatility that will punish the passive and inattentive investors. However, this same volatility will present very attractive opportunities for the active, well-informed investor.
Each month in the Global Investment Letter I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.
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