The Wells Fargo Investment Institute points out in its latest report that profits in all stock sectors have peaked, and as the economy weakens and revenue growth stagnates, corporate profits are bound to decline.
The institution stated that investors in the US stock market should "maintain a defensive stance" as listed company profits may decline under "short-term pressure.".
The report states, "We believe that as the economy weakens and income growth stagnates, profits in all stock sectors have peaked and will decline. In the short term, we expect both corporate profits and stock prices to face pressure."
Wells Fargo Bank has studied the decline in earnings per share (EPS) of the S&P 500 index over the past 12 months and warned investors that corporate profits are "unlikely to escape the economic slowdown unscathed.". The median decline from peak to trough was 21.4%.
"We expect an economic slowdown and a tightening financial and credit environment to pose adverse factors for the future," the bank wrote.
From last Friday to this Tuesday, the US stock market has been immersed in a joyful atmosphere, with the S&P 500 index hitting historic highs and closing at 4864.60 points on Tuesday.
In response, Wells Fargo Bank stated that the recent strength of the US stock market is largely related to market expectations of significant interest rate cuts, continued economic strength, low inflation, and a relaxed financial and credit environment.
"These factors do not often occur simultaneously," the report wrote.
At the same time, Wells Fargo Bank pointed out in its report that it has a "favorable" rating for US large cap stocks, a "neutral" rating for US mid cap stocks, and a "least favorable" rating for US small cap stocks.
"When the economy stabilizes and corporate profits begin to grow again, more cyclical stocks should benefit the most," the bank added.