But the margin situation remains challenging for all businesses. Numerous companies reporting contracting margins hope to see a diminishing upside pressure on input costs with stabilising supply chain logistics in the months ahead. On the other hand, the second half of 2022 should give us a flavour of wage inflation pressures for 2023, which for the first time in decades should be material - reaching double digits in some regions.
More importantly, the next few months should give us first indications of demand resilience in an inflationary backdrop. The earnings picture at company level does not seem as disastrous as some lead indicators warned ahead of the releases. Should the geopolitical backdrop not worsen and inflationary pressures peak, earnings revisions could start to bottom towards the end of the current quarter and put a floor to the market downtrend. Currently, we are still sitting on expectations of 10% earnings growth for 2022 and 2023 for the Swiss market. The market is discounting reductions around 5-7% percentage points.
The relevant trend to watch is how much 2023 earnings are going to be cut. Nevertheless, there remain several swing factors that could cause further significant slowdown in economic activity and consequently put pressure on earnings expectations for 2023. In the meantime, the US plunged into a recession with the jury still out on whether it will be a shallow (technical) one, or if we are heading to a consumer-led meltdown.
A moderation of US demand dynamics has the benefit of reducing pressure on the FED to aggressively raise rates. Any indication that we might see a pause or end to interest rate hikes would be highly beneficial to risky assets. For sure, the uncertainties foster violent swings in sentiment and volatility in all asset classes, including save havens. As volumes stay depressed, market swings and sector rotations could become even more erratic with algorithmic market models exacerbating this fragility. We are navigating these murky waters with alertness and keeping our eyes open to new opportunities to buy into quality growth that is being overly penalised by the current risk averse market environment.
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