Corporate earnings growth is expected to slow in the year ahead in many countries as higher inflation and rising interest rates take an even bigger toll and companies brace for the likelihood of a global economic downturn.

U.S. companies are forecast to have the slowest full-year profit growth since 2020 and the start of the coronavirus pandemic. Some top equity strategists predict no profit growth or even a decline in earnings.

Investors have been watching estimates fall in recent months. S&P 500 fourth-quarter 2022 earnings now are expected to decline 1.1% year on year, which would be the first quarterly earnings fall since the third quarter of 2020, according to IBES data from Refinitiv as of Friday.

For the U.S. benchmark S&P 500, analysts project full-year 2023 profit growth of 4.7% following estimated growth of 5.7% for all of 2022, based on Refinitiv data.

Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities in New York, recently lowered his profit forecast and expects a decline in year-over-year S&P 500 earnings in 2023.

"Everything is about inflation," he said. "Companies' pricing power is about inflation and the cost of their wages is inflation."

Last Wednesday, the U.S. Federal Reserve raised interest rates by 50 basis points as expected to combat inflation, and Fed Chair Jerome Powell predicted more rate hikes next year even as the economy slips towards a possible recession. The S&P 500 is down about 20% this year after falling into its second bear market since the 2020 global sell-off caused by the pandemic.

The S&P 500's forward 12-month price-to-earnings ratio has slipped to about 17 from 22 at the end of December 2021, but remains above the long-term average of about 16, according to Refinitiv data.

With valuations, much depends on whether the Fed can create a "soft landing," said Keith Buchanan, senior portfolio manager at Globalt Investments. The S&P 500 consumer discretionary sector is expected to have the highest year-over-year earnings growth in 2023, with a gain of 30.3%, while the energy sector is expected to have the biggest year-over-year decline in earnings.

Rising rates have especially hurt technology and other growth shares this year. Tech sector earnings are expected to gain just 4.3% in 2023 over 2022, and Golub and others said that may be too optimistic.

Morgan Stanley's chief U.S. equity strategist, Michael Wilson, warned in a note on Monday that "the market isn't always efficient in pricing major earnings downturns before they arrive."

SHARP SLOWDOWN IN EUROPE

European company earnings are forecast for a sharp slowdown in 2023 after a strong couple of years since the pandemic slowdown. Many companies listed on the STOXX 600 regional index have been able to pass on higher costs through price hikes.

But any global recession will pile pressure on consumers and rising interest rates could create a challenging environment for businesses.

Barclays head of European equity strategy, Emmanuel Cau expects earnings to provide a headwind for equities. The UK bank sees earning per share growth falling 12%.

"Following two and a half years of a very strong earnings rebound, base effects should be much more challenging into 2023," he said. "Our analysis shows that both earnings and margins typically contract when global GDP (gross domestic product) growth ran below trend."

STOXX 600 companies are expected to report a rise of about 8% in earnings in the first quarter of 2023, based on Refinitiv IBES data as of Friday. But they are expected to decline 4% in the second quarter of 2023, which would be the first quarterly decline since the fourth quarter of 2020.

Nevertheless, Mark Nichols and Mark Heslop, investment managers at Jupiter's European equities group, said that while the economic outlook in Europe is challenging, "the corporate outlook has some reasons for optimism." They mentioned rising mobility in the world's second-largest economy, signs of supply disruptions easing and heavy investment to address climate change.

Jefferies strategists said any degree of stabilization in energy prices will have outsized effects on profits for European companies, easing real household incomes. "Since there is still pent-up demand, this should deliver quite sizeable upside earnings surprises."

OUTLOOK IMPROVES FOR JAPAN

In Japan, strategists expect lower interest rates or higher economic growth will improve the outlook for corporate profits. In a recent Reuters poll, they said Japan's Nikkei 225 share average will rally to 30,000 next year for the first time since September 2021.

BlackRock in its 2023 global outlook said earnings expectations are not yet pricing in a recession.

Based on a Reuters Datastream analysis using 5,756 companies across the globe, with a market capitalization of at least $1 billion each, earnings are seen slowing to about 4.0% in 2023 from 4.9% in 2022.