A combination of slowing inflation and weakening consumer strength is expected to result in significant earnings downgrades, leading to potential equity market drawdowns and defensive sector and style rotations, according to JPMorgan strategists.

“Global stock prices have performed exceptionally well since Q4 last year; we believe the key driver has been improving profit expectations as sell-side analysts have reported fewer global EPS downgrades,” the strategists said in a client note.

Strategists advise investors to reduce risk heading into 2024. This is because the positive EPS trend has likely ended, with global net EPS revisions falling to -16.5% from -6.3% over the past month, and 3-month revisions dropping to -8.9% from -2.5%.

“Accelerating EPS downgrades have a very high probability of leading to equity market draw-downs and defensive sector & style rotations.”

While the USA and Japan continue to post minor EPS upgrades, Asia Pacific ex-Japan, GEM, and Europe are leading global revisions to the downside.

The JPMorgan strategists also highlighted the rare deviation between the macroeconomy and profits in 2023 due to high inflation and consumer strength, both of which are now reversing.