An anticipation of substantial earnings downgrades, fueled by a combination of slowing inflation and weakening consumer strength, is likely to trigger potential equity market drawdowns and defensive sector and style rotations, according to JPMorgan strategists.

The strategists emphasized the exceptional performance of global stock prices since the fourth quarter of the previous year, attributing it to improving profit expectations with fewer global earnings per share (EPS) downgrades reported by sell-side analysts.

However, they caution that the positive trend in EPS is likely coming to an end. Global net EPS revisions have declined to -16.5% from -6.3% in the past month, and 3-month revisions have dropped to -8.9% from -2.5%. The strategists advise investors to reduce risk as accelerating EPS downgrades often precede equity market drawdowns and defensive sector and style rotations.

While the USA and Japan are still experiencing minor EPS upgrades, the Asia Pacific ex-Japan, GEM, and Europe regions are leading the global trend in downward revisions.

The strategists at JPMorgan also pointed out the rare deviation between the macroeconomy and profits in 2023, primarily driven by high inflation and consumer strength, both of which are now undergoing a reversal.