A slowdown could be on the horizon and analysts are forecasting more earnings cuts. Taking into account a possible spike in inflation, and that mix of factors could favor a particular class of stock. Sky-high inflation has supported the US Federal Reserve’s aggressive tendency, Jefferies said in a July 29 investigative report. But a recent drop in commodity prices has given the market relief from expectations of a spike in US consumer prices, the bank said. Jefferies says a spike in inflation will benefit one class of stocks: quality stocks. Quality companies are companies with stable performance: strong balance sheets, modest debt and resilient profitability. “Our research on past periods of declining inflation expectations in the US suggests that it is time to focus on quality stocks, which have seen relative declines. [price-to-earnings] base,” Jefferies analysts wrote. In addition, Jefferies says there is a “style shift underway” after more than 18 months of a cycle that favored value stocks. “With interest rate hikes still set to slow economic growth and shrinking PE spreads, quality stocks will come back into favor,” it added. Jefferies added. In July, markets saw the first round of profit cuts, led by the United States and Asia. Most major industries are now facing cuts in consumer services, Utilities and tech hardware, Jefferies said. “We believe value will fade into the background amid declining earnings and a challenging macro environment. Globally, we are now favoring quality stocks as recession risks mount,” the bank said. . The bank has upgraded the health care and consumer sectors to overweight. : High profitability — two-year return on equity and return on invested capital above 10% Reasonable valuations — 12-month forward P/E ratio less than 25 times Good cash flows — companies with positive free cash flow conversion Growth and Revision – “relatively better” FY 2022-2023 EPS CAGR (compound annual growth in earnings per share) and three-month earnings revision Apple, Visa, chipmaker Broadcom, retailers Home Depot and Dollar General Global stocks include pharmaceutical company Roche, automaker Volvo, IT Fujitsu company and chip maker TSMC.
Stock selection on peak inflation, recession, earnings cuts: Jefferies