As equity markets swing back and forth in response to tariff developments, investors may have to recalibrate their expectations during the current earnings season.
Despite US equity markets initially selling off as much as 20% before rebounding, the broad consensus of 10% earnings growth for this quarter will likely still be difficult to achieve.
This is the view of JP Morgan Asset Management’s chief market strategist for Apac, Tai Hui, who said in a recent media briefing that he is expecting further earnings downgrades in the near term.
“We are expecting more volatility in equities, because the equity market is pricing in slower growth, rather than a recession.”
“Earnings expectations still need to be revised a little bit lower,” he said, but a stock/bond portfolio could “still outperform cash in the medium to longer term” he added.
The previous US-China trade war in 2018 was “child’s play” compared with the current level of tariffs, according to Hui.
He warned that companies and supply chains will find it impossible to absorb the impact of the proposed level of tariffs.
“It will impact exporters, importers, US retailers and consumers,” he said.
“All the bad stuff, for example margin compression and a spike in consumer prices, is going to take place because there is no one part of the supply chain that can absorb all the tariffs which have been implemented in an extremely short space of time.”
The biggest risk to the US economy
The ongoing trade uncertainty has already started to hurt business and consumer confidence but there is still time for consumers and companies to change their outlook if the backdrop changes.
However, Hui warned that the longer the uncertainty remains, the greater the risk of a US recession.
He said: “If CEOs have a cautious view for a sustained period, that will eventually turn into weaker capex [capital expenditure]. That’s the biggest risk for the US economy right now.”
“We’ve looked at previous recessions since the Second World War, and most of them were triggered by weaker capex and a weaker housing market, and less so from weaker consumer spending.”
“Where the swing factor really kicks in is from the corporate side. So, a decline in corporate spending would indicate weaker growth in the second half of this year.”
Hui said that although corporate executives may currently feel anxious due to uncertainty, if there is a clear path going forward, they will likely move ahead with their initial investment plans.
But if trade policy confusion continues, companies may find it difficult to preserve their cash flow, especially if earnings come under pressure.
Hui said: “If CEOs are starting be cautious on their earnings outlook, that might be a useful sign that capex will have to slow down.”
