Whether or not we officially enter a ‘recession,’ it is no secret that the current financial environment is difficult for many. Since the start of the year, we have seen several forces, such as inflation and interest rate increases put a squeeze on household budgets. This inevitably flows through to household budgets resulting in lower spending and slower economic activity. Even just a year ago it was much easier to justify buying that new pair of shoes or that air fryer! 

Many professionals have been saying that the next six to nine months will be crucial in understanding how markets will perform next year. One of the key indicators of this performance will be the forthcoming impact of earnings downgrades.  

While inflation and interest rates have been rocketing upwards at record speed, the market (buyers and sellers) has been trying to guess how the squeeze on household income will impact businesses around the world. This has resulted in a highly volatile sharemarket, and while the Australian market is largely neutral for the year, the US sharemarket is off around 20% (at the time of writing).  

While we know that economic activity is impacted by the year’s events, we won’t know by how much until businesses around the world start revising their earnings forecasts. It is broadly accepted that most companies will downgrade their earnings forecasts, meaning they will expect to generate less earnings than previously expected. 

When the forecasts start coming through over the next six to nine months, we will start to see how close the market was to predicting the earnings downgrades. If the market was too conservative, we could see some strong rebounds on markets. If it wasn’t conservative enough, things could get even worse. If it gets it just right (this is starting to sound like the three little bears), it could go either way!  

All we know is there are a plethora of brilliant businesses out there, and if short-term market forces put those businesses ‘on sale’, then it could be a great time to buy some more. Likewise, if a quick rebound occurs, it might be a great opportunity to take some profits out of businesses that experience short-term growth. 

Shares only make up a portion of a quality investment strategy, and your adviser at Hewison Private Wealth is always making sure your portfolio is set up to achieve your own goals and objectives.