BCA Research says that the pullback in global equity markets that’s currently underway has further to run unless oil prices retreat significantly, which it is not expecting.

Global stocks have slipped about 2% since peaking in mid-August, pressured by rising oil prices, BCA notes. “But the weakness was more pronounced than the decline in the headline index indicates — the global advance/decline ratio has fallen sharply,” it says.

“Yesterday’s equity market gains were driven by expectations that rising oil prices will compel the Fed to tighten less aggressively. Nonetheless, the equity backdrop is becoming more challenging, especially in the U.S., where a profit slowdown looms,” BCA maintains. “Declining bond yields suggest the downside risk for stocks is limited, but hopes that the Fed will back off are unlikely to propel equity markets sustainably higher in the near term.”

The firm allows that second-quarter pre-tax corporate profits in the U.S. were up 18% from a year earlier, and margins hit a post-1960s high. And, it notes, that the strong growth in profits occurred despite a weakening in corporate pricing power.

“But, it will become increasingly difficult to sustain double-digit earnings growth,” it says. “Corporate pricing power should gradually wane in line with the peak in inflation, while consumer spending is set to slow. In addition, the flattening yield curve points to an erosion in financial sector net interest margins, which will be further hit as credit growth begins to taper off.”