We also note that the interaction between consensus While falling earnings forecasts could lead stocks lower, earnings forecasts and markets has been inconsistent if the magnitude of the decline in earnings is moderate over time. In the early 2000s and in the 2008 financial – as we expect – then it would likely only lead to limited crisis, reductions in earnings forecasts led to further further downside for reasonably valued stocks, relative stock market declines; but in the early 1990s, stocks to the declines already seen in 2022. rallied as 12-month forward earnings expectations We acknowledge that it would be unusual for the stock declined (Exhibit 12). market to have bottomed already—that does not tend to occur before the unemployment rate has started to Exhibit 12: In the early 1990s, stocks rallied on declining rise and the Federal Reserve (Fed) has started to cut earnings expectations interest rates. However, the market has already declined Performance of the S&P 500 vs. drawdown in 12-month forward much more than usual before jobs have started to be earnings lost. Given this is probably the best predicted recession %, drawdown from local peak in the last 50 years, we believe there is a chance that 0 equity markets could have priced it in sooner than they normally do. -5 Overall, while we are not calling the bottom for equity markets, we do think that the risk vs. reward for equities -10 in 2023 has improved, given the declines in 2022. With quite a lot of bad news already factored in, we think that -15 the potential for further downside is more limited than at the start of 2022. Importantly, the probability that stocks -20 will be higher by the end of next year has increased sufficiently to make it our base case. -25 Jul ’90 Oct ’90 Jan ’91 Apr ’91 Price drawdown Earnings drawdown Source: IBES, Refinitiv Datastream, S&P Global, J.P. Morgan Asset Management. Earnings are 12-month forward earnings expectations. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2022. 10 A bad year for the economy, a better year for markets