Stubbornly high inflation and an increasingly hawkish Fed have sent bond yields up, pressuring equity valuations.
While the valuation correction in high multiple stocks has been the dominant narrative so far this year, economic and profit growth concerns appear to be creeping into investor thinking.
Earnings performance remains central to the outlook for the US stock market. If the US market is set to encounter either a significant cyclical or structural earnings problem, then this could significantly alter the prospects for US equities. Despite market weakness this year, US earnings have (on average) remained relatively resilient, with aggregate earnings estimates continuing to be upgraded.
However, as the US and global economy slow, at the same time as inflation pressures persist, investors are becoming more concerned around the earnings outlook. In particular, investors are wary of the potential for a combination of slower demand combined with sticky cost pressures to crimp corporate profit margins.
We share our outlook and the implications for US equities.
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Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.