BlackRock believes market can manage earnings downgrades

While global corporate earnings estimates for the rest of the year appear optimistic, stock markets are likely to be able to absorb moderate downgrades for now, according to BlackRock Inc.’s Helen Jewell.

Profit projections for 2024 have been “back-ended” into the second half, and “I would not be surprised if that did start to nudge down a little bit,” said Jewell, chief investment officer at BlackRock Fundamental Equities EMEA. “That doesn’t necessarily mean the market will drop,“ she added, citing valuations that are “not crazily high.”

“Earnings can come down and multiples will nudge up a bit to level off that expectation,” Jewell said in an interview.

Equities have rallied this year even as worries about a possible recession and weaker consumer demand have dulled the outlook for corporate earnings. Analysts now expect S&P 500 profits to rise about 9% in 2024, slightly lower than an 11% forecast as of December, according to data compiled by Bloomberg Intelligence.

Profit growth is expected to slow to 4.4% in the third quarter before surging 10% in the final three months of the year. A Citigroup Inc. index showed more analysts have downgraded than upgraded global expectations since late June.

At the same time, the MSCI All-Country World Index is around record highs, boosted by optimism that the Federal Reserve has started cutting interest rates in time to avoid an economic contraction. The index trades at 18 times forward earnings, compared with its 20-year average of nearly 15, according to data compiled by Bloomberg.

Meanwhile, analysts’ estimates for earnings over a 12-month horizon remain at all-time highs, reflecting confidence about a soft landing. Economic projections suggest US real gross domestic product is expected to slow to 1.7% in 2025 before picking up again the following year.

In Europe, analysts’ forecasts for 2024 earnings at Stoxx 600 companies have fallen 2.8% since the beginning of the year, according to data compiled by BI.

Jewell retained her preference for economy-linked stocks and sectors that benefit from artificial intelligence over the longer term.

For the coming months, though, she recommended stocks sensitive to interest rates as well as so-called defensives, which are perceived to be safer at a time of economic uncertainty. Jewell expects equities to remain “sensitive” into the year end because of events that could cause market volatility, including the US presidential election.

One major risk for 2025 is the scale of potential cuts in profit forecasts, Jewell said. 

“If we see a significant downgrade in earnings, the market will come down,” she said. “A soft landing is a range of outcomes and anything that gets too close to the recessionary end of soft landing, there is no doubt will be taken badly by the market.”