Wall Street is missing an oncoming drop in earnings that could contribute to another 20% sell-off in stocks, according to UBS. Here's how investors can avoid the pain.
Mark Haefele of UBS says a"reality check" for overly optimistic investors is coming.Most investors agree at this point that a US recession is a strong possibility. But just because they know that the chances of a recession are high doesn't mean that they're prepared for it.
"We do not expect fourth-quarter results to be a catalyst for a sustainable rally in equities. The outlook for earnings in 2023 remains negative. Many of the leading indicators suggest an earnings contraction is likely," wrote Haefele, the groups' chief investment officer, in a recent note to clients."Corporate America is yet to see the full impact of rate hikes, and the fourth-quarter reporting season might give investors a reality check on the earnings outlook.
"With valuations higher than where they stood on the eve of the last two earnings seasons, the potential upside is limited even if earnings are better than expected," he said."The near-term risk-reward is not appealing, in our view," he wrote. "In a downside scenario where we have a full-blown recession, stocks could fall 15% to 20%," Haefele wrote."Our base case S&P 500 targets remain 3,700 and 4,000 for June and December, respectively."
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