Global equities trading near all-time highs are heading for a “difficult phase” as slowing economic growth starts to dent earnings estimates, according to UBS Group AG strategists.

Forecasts for significant revenue gains in an environment where growth in gross domestic product is stalling is a “very unusual” mismatch, the strategists, lead by Andrew Garthwaite, said in a Monday note. They now expect earnings to disappoint, with profit margins threatened by rising wages and a lagged impact from higher interest rates.

Powered by high-flying tech companies, the MSCI World Index of developed-market stocks is just short of an all-time high, driven by expectations of multiple interest rate cuts in a rally that started late last year.

“At the moment, the market is behaving as though weak economic data is good (more rate cuts, lower bond yields),” the strategists wrote. “At some point this relationship reverses.”

UBS prefers defensive sectors such as consumer staples, pharma and software in this environment.

JPMorgan Chase & Co. strategists also struck a cautious tone on earnings, especially due to weakness in the euro region. The MSCI All-Country World Index earnings estimates have come down in the past few weeks, with analysts constantly revising estimates lower.

What’s more, UBS also sees factors that supported stocks in 2023 fading this year: fewer excess savings in the US and a pull-back in fiscal support measures. Its earnings estimates are 5% below analysts’ consensus expectations.

Garthwaite, who was until recently a global equity strategist at Credit Suisse, prefers emerging market stocks for their relatively better economic prospects, while being the most bearish on Europe. He prefers the UK within Europe for its “abnormally cheap defensive market.”

Meanwhile, markets opened this week on a cautious note as investors readied for central bank updates on the outlook for interest rates and braced for a deluge of earnings.

This article was provided by Bloomberg News.