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Investing.com -- Downward pressure on earnings per share (EPS) forecasts could weigh on equity markets in the months ahead, even if companies manage to beat already-lowered expectations for the first quarter, according to JPMorgan’s top strategist.
Mislav Matejka, head of Global and European Equity Strategy at JPMorgan, pointed to a sharp deceleration in weekly EPS revisions across the U.S. and Europe recently.
“Weekly earnings revisions have turned negative again in both the U.S. and in Europe, and are decelerating sharply,” he wrote in a Tuesday note.
Historically, such negative revisions have been “consistent with compressing price-to-earnings (P/E) multiples,” a trend he believes is likely to put pressure on equity performance and stall the recent market rebound.
“Both of these are likely to pressure the equity performance over the next months, and arrest the recent equity recovery, which was aided in part by the oversold technical positioning,” Matejka explained.
While first-quarter forecasts appear low enough to be beaten, the focus will likely shift to companies’ guidance amid heightened trade policy uncertainty. Matejka believes guidances are likely to come in far less good compared to results, which companies could use as an opportunity to lower their outlooks.
Moreover, activity momentum weakened in Q1, with softer global PMIs and declining new orders-to-inventories ratios also pointing to a more cautious corporate tone on future outlooks.
Following the recent EPS estimate cuts, the S&P 500 Q1 earnings are now projected to fall 8% quarter-on-quarter, marking a significantly steeper drop than the typical 1% seasonal decline.
Median EPS growth in the U.S. is just 1% year-on-year, with earnings outside of the Mag-7 group expected to rise only 3%, extending a “3-year long streak of at best single digit earnings delivery.”
Matejka believes cyclicals and exporters are expected to have the most challenging guidances. As such, he sees Defensives as the place to hide for investors, particularly if bond yields fall.
Commodity sectors could hold up better, supported by earnings forecasts that remain above spot price levels.
Annual EPS forecasts are being revised downward, with projections already cut by 2% year-to-date in both the U.S. and Europe. Matejka expects further downside if recession fears continue to build.
In contrast, European earnings could show relative strength for the first time in two years, due to a narrowing gap in regional PMIs and less aggressive consensus assumptions.
“We believe that the European EPS delivery will be looking more promising vs the U.S. than it was in the past quarters, with the gap likely to keep closing,” Matejka said.