Risk-reward not favour a sustainable rally in equities – UBS
|After the 4% gain this past week, the S&P 500 is now up 9% from the 12 October low. Nonetheless, economists at UBS do not expect a sustainable rally in equities in view of the risks.
Pressure on corporate profits will only increase in the coming quarters
“Despite some Fed officials commenting on the potential for a slower pace of rate hikes, we think it is too early to expect a Fed pivot. Inflation remains too high, we think the Fed sees its own credibility at stake, and we expect it to keep hiking aggressively until the official data show inflation is receding. Even when the Fed finally does stop raising rates, it’s worth remembering that monetary policy is likely to remain at restrictive levels for some time.”
“Year-over-year 3Q S&P 500 earnings per share (EPS) growth is tracking below our original 3-5% expectation. With 70% of the S&P 500 market cap having reported earnings, it looks likely that growth will be in the 1-3% range.”
“We believe the pressure on corporate profits will only increase in the coming quarters. As a result, we look for S&P 500 EPS to fall 4% next year to $215. In a full-blown recession, EPS could fall to around USD 200. This compares to bottom-up consensus estimates of $235.”
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