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US earnings surprise investors: Here’s why you should remain cautious

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The US economy is continuing to battle high inflation which is likely to see share markets fall.

US companies are reporting mostly upbeat news during the latest round of earnings season, but the surprising uplift in shares doesn't mean the worst is over, industry experts reveal.

In a prime example of the macro factors the market is facing, inflation pressures saw a brutal sell-off during Friday's trading period.

The Nasdaq fell 3.94% and the S&P 500 was down 3.37%.

This was all off the back of Federal Reserve chairman Jerome Powell's short and blunt remarks that his outfit would remain aggressive when it comes to fighting inflation.

But zooming out, and the mood has been largely positive for investors over the last quarter.

Especially for individual companies.

The second quarter reporting season shows the earnings growth of the S&P 500 stands at 8.8%, with 78% of companies beating expectations.

Energy and industrials were the clear winners off the back of geopolitical tensions in Russia. While consumer retail, including big names such as Target, Walmart and Best Buy, all told the market they were slashing their profit forecasts.

According to Principal Global Investors' chief global strategist Seema Shah, investors should remain on high alert, despite the latest reporting season results.

"2Q22 earnings season has been generally positive, alleviating investors' immediate concerns of inflation's effect on corporate profitability," Shah said.

"However, the macroeconomic backdrop is still likely to deteriorate further only adding to concerns around future challenges to corporate margins and sustainable profit growth."

Assets to fall another 20–25%

In a more dire warning, US investor Bridgewater Associates co-CIO Greg Jensen believes assets could fall by 20–25% as the US Federal Reserve continues to fight inflation through raising interest rates.

In an interview with Bloomberg, the famed investor warns the market is assuming that inflation will slow dramatically towards the Fed's 2% target in the next 18–24 months.

This follows BlackRock saying inflation will last for years.

The CIO of the world's largest hedge fund says inflation could get stuck at 3–4% and suggests that markets have significant ground to cover to bring the real economy closer to the financial economy. In other words, the share market could fall.

"We're still something like 25–30% above the normal relationship between cash flows and asset prices, which means there's a significant decline to come to kind of align the real economy with the financial economy," Jensen said.

The CIO is predicting market declines in stocks and bond prices.

"In aggregate, let's say asset markets decline at something like 20–25%," he said.

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