Global earnings downgrades haven't been this bad in seven years

[LONDON] Stocks are losing their last line of defense.

Amid a selloff that erased more than two years of gains - about US$14 trillion - from global stocks now on the brink of a bear market, at least earnings stood as a potential bright spot. Those hopes are fading: analyst profit downgrades outnumbered upgrades by the most since 2009 last week, according to monthly data from a Citigroup Inc. index that tracks such changes.

Declines in oil and and other commodities, the withdrawal of Federal Reserve support, Europe's fragile recovery and China slowdown fears are combining to jeopardize one of the few remaining stock catalysts after a global rally of as much as 156 per cent since 2009. And profit growth estimates are still too high for this year and 2017, says Bankhaus Lampe's Ralf Zimmermann.

"The momentum in the global economy is slowing down to such an extent that people are seriously talking about recession," said Mr Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. "This is not just China, it's far more widespread. There are few places to hide. Even defensives will feel the pain."

Economists' projections for worldwide expansion in 2016 have dropped steadily in the past months to just 3.3 per cent, with estimates for China and the U.S. falling since the summer. The biggest bears are getting more bearish - DoubleLine Capital's Jeffrey Gundlach sees global growth slowing to just 1.9 per cent in 2016, making it the worst year since the aftermath of the financial crisis in 2009.

This earnings season may not provide much reassurance, say strategists at JPMorgan Chase & Co. Analysts project a 6.7 per cent contraction in fourth-quarter profits for Standard & Poor's 500 Index members. For peers in Europe, estimatescall for growth of just 2.7 per cent for all of 2015, about half the pace predicted four months ago.

There are some pockets of optimism: lower energy prices may encourage consumers to spend more, Europe's recovery has been exceeding expectations and the Fed has given itself the flexibility to delay further rate hikes. The earnings bar is so low that the scope for positive surprises is great, says ETF Securities' James Butterfill.

"Fundamentals in the US and Europe still look pretty good," said Mr Butterfill, head of research and investment in London. "Markets seem to be overly focused on the poor state of global manufacturing, and losing their view of the consumer. Confidence is rising, people have more money in their pockets, and company earnings should reflect that. Now is a good opportunity to buy because everyone is so bearish." For others, the outlook is gloomy. Europe's resilient recovery is threatened by companies heavily relianton American and Asian demand.

"Even without a recession, profit forecasts for the full year are too optimistic," said Stewart Richardson, chief investment officer at RMG Wealth Management in London. "It's not just a China problem, US growth is slowing on its own right. It looks like Europe is not slowing, but give it six or 12 months and maybe it will be."

BLOOMBERG