Citi Strategists Say Profit Downgrades Pose Risk to Equity Rally

(Bloomberg) -- After a difficult first five months of 2022, the pain may not be over yet for global equity markets, according to Citigroup Inc. strategists.

The prospect of downward revisions to earnings estimates is the latest headwind to face stock investors, already rattled by runaway inflation and the potential impact of central-bank tightening aimed at controlling it, the strategists led by Jamie Fahy wrote in a note.

With quantitative tightening yet to hit full stride, negative economic data and profit revisions will bring increased realized volatility, “much lower” expected returns, and “most ominously, much larger left-tail risk” for stocks, they wrote, adding: “We are sellers of rallies rather than buyers of dips.”

Resilient earnings have been among the few factors offering support to equities this year, so signs of any cracks would be a worry for investors given that cheaper valuations have helped stocks rally in recent weeks.

And Fahy sees estimates as being at risk. “Despite concerns regarding recession, EPS expectations for 2022/2023 have barely changed,” yet with more tightening to come and forecasts still well above recessionary territory “the market will remain vulnerable to further downside.”

Earlier: 

• Barclays' Cau Says UK Fiscal Package Cuts Downside FTSE 250 Risk
• European Stocks Edge Higher as Traders Weigh Cheaper Valuations
• Wall Street Sees Any Stock Market Rally as Likely Short-Lived

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