U.S. earnings expectations turn negative for first time in 23 weeks as analysts flag inflation and rate risks

Key shift in sentiment reflects growing concerns over inflation and rising interest rates

Stock analysts have turned net negative on the outlook for US corporate earnings for the first time in several months, according to a note from Zhitong Finance. The shift reflects mounting concerns that inflation and rising interest rates are eroding corporate profits.

A Citigroup index shows that for the first time in 23 weeks, the number of analysts downgrading earnings forecasts has exceeded those upgrading them, ending the longest upward revision cycle since September 2021.

Consumer and Materials Sectors Lead the Downturn

Stefan Kemper, Chief Investment Officer for Germany at BNP Paribas Wealth Management, attributed the weakness to several key sectors.

"The main drivers of this weakness come from the consumer sector, including both staples and discretionary, as well as raw materials and financials," Kemper said. "I believe these (earnings) downgrades can be directly attributed to the combined effect of rising living costs and higher energy prices."

While Wall Street analysts broadly remain confident in a bumper earnings year for US companies, some have begun to raise concerns about the short-term outlook for the stock market.

Earnings Forecasts Face Significant Downside Risk

This view is gaining traction among major institutions. Helen Jewell, Chief Investment Officer for Fundamental Equity International at BlackRock, the world's largest asset manager, recently noted that market forecasts for US corporate earnings this year remain "at quite high double-digit levels — 15%, 16%, 17%, 18%" — leaving considerable room for downward revisions.

Jewell specifically highlighted that, given current interest rate levels and the inflationary impact of the Middle East situation, the expectation of stable earnings in the consumer sector is "difficult to sustain." In her view, improvements in energy and materials sector earnings will be offset by downgrades in sectors such as airlines, with overall profit growth potentially ending up "roughly flat."

Valuation Risks Also Raise Alarms

Beyond earnings downgrades, valuation risks are also drawing strategists' attention. Michael Wilson, Chief US Equity Strategist at Morgan Stanley, warned that if stock valuations continue their recent decline and rising energy prices force tighter monetary policy, the S&P 500 could face a downside of up to 7%. His team further noted that the market's sensitivity to interest rates has risen to its highest level in recent years, with the 10-year US Treasury yield approaching the key threshold of 4.5%. Rate hikes remain a core risk variable hanging over the stock market.

No Room for Easing at the Macro Level

The macroeconomic environment also offers little room for policy easing. The Organisation for Economic Co-operation and Development (OECD) projects that global inflation will be faster than previously forecast through 2027, making further monetary tightening necessary. Meanwhile, the Federal Reserve earlier this month raised interest rates for the first time in three years in response to price pressures. The combination of high inflation and high interest rates means that both corporate profit margins and stock valuations will face simultaneous pressure.