Wall Street Firms Slash S&P 500 Price Targets As ‘Concerned’ Analysts Warn Of Earnings Slowdown

A handful of Wall Street’s biggest firms are slashing their S&P 500 forecasts for the year, predicting lower stock market returns thanks to a difficult quarterly earnings season ahead as companies wrestle with surging inflation and rising interest rates.

With the stock market down roughly 20% so far this year amid fears of a looming recession, there are “lots of reasons to be concerned” about upcoming corporate earnings—with an incoming “flurry of downward revisions,” Bank of America warned in a recent note.

Though quarterly earnings season has just started, Wall Street analysts are slashing forecasts—with seven out of 11 S&P 500 sectors facing reduced earnings estimates, according to FactSet data. UBS on Monday slashed its earnings forecasts due to slowing economic growth and rising costs, with the firm also reducing its year-end price target for the S&P 500 to 4,150—down from a previous estimate of 4,850.

Evercore ISI also cut its year-end S&P 500 target the same day, to 4,200 from 4,300, as analysts sounded the alarm on corporate margins and earnings being “under pressure as prospective recession scenarios develop.”One of Wall Street’s biggest bears (who has also warned of further downward earnings revisions) is Morgan Stanley chief strategist Mike Wilson who is maintaining a year-end S&P 500 target of just 3,900, while also predicting the index could fall as low as 3,000 if a recession hits.

Even some of Wall Street’s most optimistic strategists are slashing their S&P forecasts somewhat, including Oppenheimer chief investment strategist John Stoltzfus, who reduced his estimate to 4,800 from 5,330 amid “palpable risks of recession.”

Despite the gloomier forecasts recently, most Wall Street firms still predict a market rebound by the end of 2022, with the majority of price targets implying modest upside from the S&P 500’s current level of around 3,850. UBS and Evercore ISI’s most recent forecasts for the benchmark index both imply roughly 8% upside from current prices, while Oppenheimer’s price target suggests the market will rally nearly 25%. Even Morgan Stanley’s bearish outlook of 3,900 would mean stocks post a slight gain by the end of the year..

Even as recession fears remain front and center, not all Wall Street firms are forecasting an economic downturn. Analysts at Credit Suisse, for instance, also slashed their S&P 500 price target (to 4,300 from 4,900) but argued that the economy’s current slowdown is not recessionary. “Recessions are most accurately characterized by a meltdown in employment accompanied by an inability of consumers and businesses to meet their financial obligations,” Credit Suisse analyst Jonathan Golub said in a note on Tuesday.

“While we are currently experiencing a meaningful slowdown in economic growth (from extremely high levels), neither of the above conditions are present today.” UBS strategist Keith Parker similarly sees slowing growth “but no recession,” with modest gains for the stock market ahead as he predicts high inflation will eventually subside.

Investors remain “nervous” about the upcoming inflation report on Wednesday, with experts predicting that consumer prices for June will surge higher than the 8.6% recorded in May.

Sergei Klebnikov

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.

Source: Wall Street Firms Slash S&P 500 Price Targets As ‘Concerned’ Analysts Warn Of Earnings Slowdown

Critics:

The S&P 500 Index (US500) has reacted to the US Federal Reserve (Fed)’s ultra-hawkish stance by shedding over 20% in the first six months of 2022.

As Fed chair Jerome Powell puts his foot on the pedal and accelerates quantitative tightening, investors now fear that decreasing money supply will push the US economy into a recession. Analysts remain divided on the likelihood of a recession as they await economic data, which remains key in anticipating the severity of rate hikes in the second half of the year.

S&P Global summed up the current market sentiment in its third quarter US economic outlook report: “We expect that the Fed raising interest rates and reducing its balance sheet will be enough to eventually begin to tame inflation and help restore real wage strength and purchasing power. The question is whether it will push the US into recession as well.”

After hitting its lowest level since December 2020, the S&P 500 rebounded by over 6% in the fourth week of June, breaking a three-week losing streak in the process as short squeezes caught bears off guard. Jefferies called the current market sentiment “extreme” in a note dated 27 June, having seen net S&P 500 futures turn to net short, according to the Commodity Futures Trading Commission’s (CFTC) S&P 500 speculative net positions data for week ended 24 June.

“Thoroughly depressed sentiment, an extreme in short positions and rising cash levels are creating a vicious short squeeze,” said Sean Darby, global equity strategist at Jefferies. Despite seeing a recent rally in prices, the S&P 500 posted losses of close to 9% in June. As of 6 July 2022, the US benchmark index has lost close to 20% year-to-date (YTD).

In comparison, the tech-heavy Nasdaq Composite Index has slumped nearly 30% in the same period, while the Dow Jones Industrial Average index has shed about 15%. Based on the 5 July close of 3,831.4, the S&P 500 remains below its 200-day exponential moving average (EMA) of 3866.9. After dropping to near oversold zones on 16 June, the index’s 14-day Relative Strength Index (RSI) has risen to a near-neutral zone of 56 points, as of 6 July.

The Jefferies report said that “investors are now holding high levels of cash after one of the worst drawdowns in modern history”. The report showed that the S&P 500’s 12-month forward price-to-earnings was “just above” its long-term average. “The multiple correction has been driven by long rates and not necessarily earnings revisions,” added Jefferies. As of 6 July 2022, the S&P 500 index was about 20% away from its all-time high of 4,818, which it reached on 3 January 2022.

By Mensholong Lepcha