Investing.com -- Investor sentiment is souring amid rising fears of a recession or stagflation, according to a new report from BCA Research.
Based on client polls, the firm found that “few are willing to buy the dip or expect the market to reach new highs,” with defensive positioning emerging as the consensus strategy.
Policy uncertainty, particularly around tariffs and U.S.-China trade tensions, is fueling investor caution.
BCA Research noted that “the new U.S. trade policy is bound to have a meaningful effect on corporate profitability,” as many companies “lack the pricing power to pass on price increases to their customers.”
The firm explains that the S&P 500 remains heavily weighted toward goods-producing sectors—especially Healthcare, Technology, Industrials, and Materials.
However, sectors such as Consumer Discretionary, Industrials, and Materials are especially vulnerable to cost pressures from new tariffs due to limited pricing flexibility.
BCA warned that these sectors “are likely to absorb tariff-related cost increases into margins,” leading to earnings pressure.
BCA’s analysis suggests a significant impact: “Tariffs will deduct two percentage points from the S&P 500 net margins.” In response, valuation multiples are expected to contract to a “new fair value PE NTM of 17x.”
As earnings season approaches, investors are shifting their attention from backward-looking results to forward guidance.
“Investors are now more focused on corporate guidance than earnings,” BCA wrote, as they attempt to “gauge the effect of tariffs on companies and industries.”
Looking ahead to the second quarter, BCA expects a wave of downward revisions. “As companies process the effect of tariffs and the trade war, we expect a lot of negative or pulled guidance for Q2 and anticipate an avalanche of downgrades to follow.”
“Investors’ mood is dour, weighed down by policy uncertainty and negative news flow,” concluded the firm.