By Caroline Valetkevitch

NEW YORK, (Reuters) – Investors already struggling to recover from last week’s bearish market confirmion are becoming more concerned about the impact of rising interest rates and dizzying inflation on U.S. corporate earnings.

Refinitiv’s IBES data indicates that while the second-quarter profit growth estimates have been falling in recent weeks. However, they have maintained or increased their forecasts for 2022, as well as for 2022 all. As of Friday, Wall Street analysts expected S&P 500 earnings to grow by 9.6% in 2022, up from 8.8% at the start of April and from 8.4% on Jan. 1.

Strategists are concerned that these estimates will not be sustained. Many believe there will be more bad news from U.S. businesses in the weeks ahead and that this information will also reflect in estimates of consensus profit growth.

Most S&P 500 companies will report second-quarter earnings after mid-July, and software giant Microsoft (NASDAQ:) and retailer Target In recent weeks, (NYSE:) were among those companies that issued dour outlooks.

Chase Investment Counsel president Peter Tuz stated that estimates are excessively high and would begin to fall as second-quarter figures come out, as well as as conversations between companies about the results.

Markets that have been hampered by concerns about the Federal Reserve’s aggressive response to inflation are facing more difficulties as they expect lower profit expectations.

The S&P 500 finished Monday more than 20% below its record closing high, confirming the index is in a bear market, according to a commonly used definition. The drop followed stronger-than-expected inflation data last week that ratcheted up expectations for how much the Fed will need to tighten monetary policy in order to tame consumer prices.

The Fed increased rates Wednesday by 75 basis points. It is the Fed’s largest rate increase since 1994.

The argument that stocks are still highly valued despite the sharp fall in their value could be supported by worries about corporate profits. The S&P 500’s forward 12-month price-to-earnings ratio stood at 17.1 as of Friday versus 22.1 at the end of December but was still above its long-term average of about 16, Refinitiv data showed.

The United States faces many challenges, including a stronger dollar. Microsoft cited this when they cut their fourth-quarter revenue and profit estimates earlier in the month. Companies with international operations that convert foreign currencies into dollars typically see a stronger dollar erode their profits.

Expectations of increased U.S. interest rates and higher geopolitical tensions have led to an increase in the U.S. currency’s value by about 9% thus far this year.

Microsoft’s announcement will make investors curious about other software and technology companies, such as Adobe (NASDAQ) Inc. IBM Synovus Trust portfolio manager Daniel Morgan said that the company will be discussing currency issues in future reports. Adobe is expected to announce its second-quarter results Thursday morning.

Retailers and consumer discretionary businesses will also be closely monitored, as they have been struggling to cope with the rising inflation. Walmart shares (NYSE:) along with other large retailers suffered a sharp drop last week as Target reduced its quarterly profit margin forecast. Target also stated that it will have to offer deep discounts in order to clear inventories.

Sky-high oil prices, rising interest rates and other challenges have also weighed down tech and growth stock valuations, whose value heavily depends on future cash flows. The recent COVID lockdowns in China may also be a problem.

We expect that the energy crisis will impact growth, and raise labor costs will eat into profit margins. The problem: Consensus earnings estimates don’t appear to reflect this,” analysts at Blackrock (NYSE:) wrote in a recent note on why they are not “buying the dip” in stocks.

Jefferies equity strategist Steve DeSanctis said that while consumers are “shifting”, it doesn’t seem like they are slowing down. This could suggest that some retailers may be able to benefit even if they feel the pinch.

Kristina Hopper, Invesco chief global strategist, says that investors could be already pricing earnings losses due to the recent fall in stocks.

She stated that the question now is “Whether it comes so quick and furious it really shakes out market confidence even more.”