US markets could head lower as earnings downgrades pick up pace: Chris Wood

Earnings downgrades amid an economic recession are the next big worry for the US markets that are already grappling with inflation-related woes, said Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear. This, he feels, can trigger more downside in the US markets that can drop substantially lower compared to their June 2022 lows.

"The S&P500 has broken below its June low. Does this mean that US equities should be bought? A short-term rally off this level would not surprise. But, in GREED & fear’s view, US equities are, sooner or later, likely to break below the June low decisively for the simple reason that US earnings have barely been downgraded yet and the base case is that the US is heading for recession," Wood said.

Most US indexes have lost considerable ground year-to-date (YTD) and are now trading in bear territory. Tech neavy NASDAQ has tanked over 31 per cent YTD, while the S&P500 and the DJIA have slipped 23 per cent and 20 per cent, respectively. Typically, an index or a stock is said to be in a bear phase if it falls 20 per cent or more from its peak.

Corporate earnings in the US, meanwhile, are likely to be under pressure amid recession fears. Analysts have already started cautioning investors as regards a drop in earnings. Those at Bank of America, for instance, downgraded Apple to neutral from buy on Thursday, writing that demand trends could worsen heading into the new fiscal year. The stock slipped 4.9 per cent in this backdrop and wiped off nearly $120 billion from Apple’s market capitalisation (market-cap).

On the other hand, Meta CEO Mark Zuckerberg, according to reports, told employees on Thursday that it is going into a 'hiring freeze' mode and warned them that more downsizing is likely coming.

Impact on Indian markets

A fall in the US markets, analysts said, could trigger a slide in global markets, especially in India. Those at Morgan Stanley, for instance, say that the US interest rate cycle, and the US dollar could continue to be sore points for Indian equities going ahead.

"Historically, Indian equities have entered bear markets when the US has slipped into recession. The US interest rate cycle and, thus, the US dollar could continue to be a source of volatility for Indian equities in the coming months due to their negative effect on earnings and balance of payments (BoP). Indian equity return correlations with the rest of the world have risen in recent weeks and could remain elevated for now," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a recent co-authored report with Sheela Rathi, Nayant Parekh and Apurva Jain.

With interest rates rising globally and the global growth environment incrementally becoming more challenging, analysts at Credit Suisse Wealth Management believe equity valuations could come under pressure going ahead.

"While we continue to believe India remains in a sweet spot and could likely continue to command a valuation premium versus peers due to superior fundamentals, some caution and risk management are warranted at current levels. We recommend investors be prudent in their equity allocation strategy. We continue to maintain our long-held positive outlook on India midcaps," wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a recent coauthored note with and Premal Kamdar.