Equities at Risk of Decline Due to Weak Global Growth and Poor Earnings, Warns UBS
Financial experts at UBS have issued a warning that global stock markets may experience a sell-off in the second half of the year. They attribute this potential downturn to several factors, including sluggish global growth and disappointing company earnings. Market analysts, including those at UBS, have long predicted that a recession and weaker earnings could pose risks to stocks in 2023. Now, these risks may be manifesting sooner than expected.
In a note to clients on June 28, UBS strategists, led by chief strategist Bhanu Baweja, highlighted the weaker-than-anticipated growth and its implications for the market. They argue that global growth is currently below 2% on an annual basis, significantly lower than the long-term average of 3.5%. They also pointed out that stock correlations are already low, credit rating downgrades are increasing, and liquidity drain is accelerating. These indicators suggest that valuations are likely to be compromised even before earnings take a hit.
UBS predicts that the S&P 500, a widely used benchmark for the U.S. stock market, may close at 3900 by the end of the year, representing a 10% decline from current levels.
One area of concern highlighted by UBS strategists is the health of the credit market, particularly leveraged loans, which are susceptible to rising floating rates and defaults. UBS’ latest research indicates a deterioration in credit conditions. According to Matthew Mish, head of credit strategy at UBS, May has witnessed the highest number of downgrades to CCC (junk) ratings and defaults in at least 18 months. Mish believes that bankruptcy filings, worsening credit ratings, and falling traded prices for defaulted leveraged loans are indicators to watch for an increase in credit spreads.
Mish also identified technology, consumer and business services, and the healthcare sector as being particularly vulnerable due to their high debt concentration and lax underwriting standards over the years.
Contrary to the argument that many firms have deferred their debt issuance, thereby preventing a widening of credit spreads, Mish suggests that this theory is outdated. He asserts that weak earnings and liquidity profiles could lead to companies being downgraded to the lowest debt ratings, resulting in significantly higher funding costs.
All these factors contribute to a potentially challenging time ahead for equities. While UBS’s outlook for second-half earnings is lower than market expectations, the bank believes it may take until the third quarter for market estimates to be revised downwards.
In conclusion, UBS strategists warn of a potential stock market sell-off driven by weak global growth, poor earnings, and challenges in the credit market. Investors are advised to proceed with caution as the risks of a downturn are becoming increasingly evident.
