JPMorgan strategists have once again warned that corporate earnings growth may end up flat rather than higher, contrary to consensus expectations for the next year.

The team of strategists notes downside risks to earnings, pointing to negative producer price indexes (PPIs) and the potential for EPS revisions to roll over again.

“Equities do not look expensive in Europe, US is more stretched, but valuations will be hostage to earnings delivery, not to yields moves,” the analysts said in a client note.

JPMorgan highlights the risk of higher costs of goods sold, lagging wage increases, higher financing costs, and potential deterioration in sales mix and volumes.

JPMorgan suggests that the environment for risky assets is expected to be challenging in the first half of 2024, with periods of notable weakness. However, there is a possibility of improvement in the latter part of the year.

“In the 1H of next year, equities will likely need to negotiate earnings adjustment, as activity slows. We believe that the risk-reward for equities will start fundamentally improving once the Fed is advanced with interest rate cuts.”

The strategists anticipate downside earnings risks for sectors such as banks, autos, consumer discretionary, and industrials, while utilities and energy/mining could exhibit more resilience.

“Thematically, we avoid stocks with elevated margins vs pre COVID, especially on bloated pricing. Increased Defense spending remains a big theme for 2024, and beyond, as well as Aerospace,” the analysts concluded.