This year’s sell-off in equities has primarily been led by declining valuations rather than a shift in earnings expectations. This is not uncommon - stock prices tend to move in advance of changes to profit forecasts, rather than the other way round. We do expect analyst downgrades ahead as corporate margins come under pressure, but market moves now look broadly consistent with a modest downturn in profits. Pricing power will likely vary across industries, with companies that are exposed to higher income cohorts likely to fare better than those that are more sensitive to spending from lower income groups, where higher food and energy prices will absorb a much larger share of total spending. We discuss the prospects for corporate earnings in more detail in our Mid-Year Investment Outlook 2022: Assessing recession risk.

Equity markets have moved ahead of earnings downgrades

% drawdown from peak, MSCI World stock prices and earnings