Charts and caffeine: Could Aussie corporate earnings really fall 20%?

Charts and Caffeine

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

  • S&P 500 - 3,822 (-2.01%)
  • NASDAQ - 11,182 (-2.98%)
  • CBOE VIX - 28.36
  • FTSE 100 - 7,323 (+0.9%)
  • STOXX 600 - 416.69 (+0.27%)
  • USD INDEX - 104.51
  • US10YR - 3.177%

THE CALENDAR

US consumer confidence tumbled to 16-month lows last month. Soaring inflation and concerns over a recession saw the number tick down below the important 100 level (to 98.7)

Later today, we'll hear the pre-audited inflation print from Germany where inflation is set to remain a scorcher. US GDP should also be a trading floor-stopper, especially if it confirms the US is in a recession. OPEC is holding its once-a-month meetings starting today. Finally, a whole litany of central bank speak (US: Powell and Mester, UK: Bailey, ECB: Lagarde).

THE CHART

The US equivalent of our main theme in today's wire. Notes and research from Goldman Sachs suggest stocks do not appear “to be fully reflecting the downside risks to earnings." They project profit margins for the median S&P 500 company will likely decline next year - making the top line compressed and earnings-per-share a little dourer than what some investors might be used to.

STOCKS TO WATCH

Normally, I'd give you a whole list of stocks. Today, I thought I'd do something different and offer you a heading from UBS' latest note on equity strategy.

Earnings to fall 20% over the coming six months on economic 'soft landing'

Yes, you read that right. Even if central banks can engineer rate rises without causing a recession in the real economy, UBS analysts still think earnings could fall 20%. Strategist Richard Schellbach says earnings (which traditionally lag equity prices) are now on course to follow lower. Further, he is now "assuming" that we will be facing cuts to earnings estimates through to early 2023.

Schellbach hastens to add - it could be worse. 

In a hard landing scenario, earnings could fall by more than 30%! The silver lining is that sound balance sheets and flexible return-on-equity figures should mean this is not likely.

So with all this in mind - where would Schellbach's team invest? Here is his take:

Tightness is still endemic through commodity markets, and although inflation may be near a peak, the elevated bands at which it will stay should ensure that Resource equities maintain leadership within equity markets. 
Consumer Staples join as an Overweight recommendation, due to the visibility and stability of their earnings streams. By contrast, we switch Consumer Discretionary to Underweight given we are not inclined to fight what looks like a vicious earnings downgrade cycle.

For Macquarie's take on a similar issue, you can click on this article:

Asset Allocation
Macquarie reveals its 16-stock "recession-proof" portfolio

THE TWEET

One for the nerds - when you've tried everything, why not try the idea that everyone but the people in the decision-making room have been saying?

THE QUOTE

If you are distracted or rest on your laurels, as I saw happen with various entrepreneurs who started out with me, without your realizing it, someone will come and claim your business.

Leonardo Del Vecchio, the Italian entrepreneur who grew up in an orphanage and went on to amass a multibillion-dollar fortune as the owner of such names as Rayban, died earlier this week. This quote from an Italian newspaper speaks to how a lot of people may feel about lots of things - from work to investing to passion projects.

As the saying goes, the grind never stops.

GET THE WRAP

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Charts and Caffeine
Markets Wrap
Livewire Markets

Charts and Caffeine is Livewire's daily pre-market news and analysis wrap. Every day, Livewire's team of market journalists and editors get you across the overnight session and share their best insights to get you better set for the investing day...

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