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Earnings estimates for 2019 are falling fast! What would I do?

Can last month’s stock market sell-off best be described as an overdue pull-back, reflecting the increasingly problematic economic outlook facing the global economy, or a frenzied panic with investors acting out of emotion rather than using their heads?

My opinion, like that of many market commentators, suggests that the reality sits somewhere in the middle. You cannot doubt, though, that the trading landscape has become tougher as we have moved through 2018, and this resonates in City forecasts which have become more and more pessimistic.

Indeed, in a recent report, research house Edison noted that it has witnessed “a modest acceleration of downgrades to 2019 UK and continental European profits forecasts,” estimates that have been trending lower since August. It said that forecasts here have fallen around 2.5% over the past three months as, “in addition to signs of ebbing economic momentum within the eurozone, the specific Brexit and budget risks in the UK and Italy respectively appear to have pincered investor sentiment.”

Cut across the board

Edison noted that estimates have fallen elsewhere too. In the US, things have not been as bad and estimates have been “fractionally” downgraded. But in emerging markets, forecasts have taken a much larger beating, the researcher said, with growth targets having been reduced to around 11% from 15% previously.

Looking at the bearishness across markets, Edison commented that “investors have perhaps belatedly woken up to the prospect of increasing inflation pressure at a time when profits growth is declining,” prompting analysts to get busy their 2019 profits forecasts.

It added that the withdrawal of monetary stimulus from both the Federal Reserve and the European Central Bank has smacked broker optimism too.

What should we do next?

In the current climate the easy option would be to sell up and stash your cash in a (theoretically) low-risk, cash-based account. The interest rates might be bad, but at least your capital is locked up safe and sound, right? Wrong.

Now, I’m not going to say that fresh turbulence in global share markets won’t happen in the weeks and months ahead. The macroeconomic and geopolitical risks have grown exponentially over the past few months, after all, whether it be the rising probability of a no-deal Brexit; the fallout of fresh US sanctions on Iran; the continuation of fiery trade war talk between Washington and Beijing; new fissures in European Union harmony as the bloc battles Italy and its controversial domestic budget…

I could be here for hours discussing all of the possible problematic scenarios facing the regional and world economy as we move into 2019. However, I remain convinced that the increasingly-perilous investment environment doesn’t mean that you need to pull up the drawbridge — it just means that we as stock investors need to be more careful before splashing the cash.

Tying your capital up in cash accounts can seriously damage your wealth, as we at The Motley Fool have explained time and again. Stock market turbulence may test the nerves, but it’s long been proven that share investing is the much better way of protecting your savings and making your money work for you. And there’s no shortage of expert reading material to help you avoid those trading pitfalls and create handsome investment returns. I know stock markets remain the best place to park my cash. Just be careful out there!

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.