(New York)

The market just hit fresh highs and we are making progress on the trade war; everything is good right? Wrong, says UBS. The bank has just put out an unusually bold warning, saying markets are likely headed for a big decline. Why? Earnings. Earnings growth forecasts for 2020 have tumbled from a peak of 23% to the just 1% now, a huge fall in expectations. That all comes as the growth backdrop for the economy is weakening, and signals that valuation multiples are likely to contract. “Every bear market of the past 50 years has witnessed an actual decline in S&P 500 forward earnings … Ultimately, the most vulnerable macro backdrop for equities occurs when forward earnings growth turns negative as LEIs are trending downward (pushing [price-to-earnings] lower)” says UBS.

FINSUM: An earnings bear market can easily turn into a real bear market, though it doesn’t always happen.