Citi argues that tightening credit conditions are beginning to hit corporate investment and earnings and that the resiliance the market has demonstrated so far cannot continue indefinitely:
With banks tightening up credit standards to typical recession levels, one should expect to see a sharp deceleration and ultimately decline in C&I loans with a commensurate impact on company revenues. While this may have been a bit delayed by companies drawing down all remaining credit lines, given a less than accommodative bond market, it seems implausible to suggest that the typical relationship will not resume.
Of greater concern, however, is the apparent lag between Wall Street earnings estimates and the emerging economic reality. Soaring energy prices, along with the concurrent downturn in consumption and investment, both in the US, and now in Europe, will eventually translate into earnings misses:
With more data available including the latest leading economic indicators and CPI/PPI results, our proprietary profits gauge is suggesting more EPS stress for the S&P 500. Plus, this does not include the effect of a probable slide in European business trends. In this context, earnings risk from the real economy rather than the housing and financial segments seems quite high.
Earnings estimate revisions show that the per cent of downward revisions are still well above
trends normally associated with recessions. Moreover, the surprising though sustained upward trajectory of oil and gasoline prices must be pressuring global economic growth prospects and thereby corporate profits outside of the Energy sector.
On the plus side, Citi thinks that the “Super Spike” in oil prices will soon abate:
Higher energy prices are having negative repercussions for other parts of the economy, but the oil super spike has generated extreme outperformance relative to other real assets that does
not seem sustainable.
Thank goodness for that.
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