Equities analysts at Morgans have lowered price targets and earnings expectations for the entire buy now pay later sector, with Aussie companies Afterpay and Zip expected to be hit the hardest.

In a note to clients, Morgans analyst Richard Coles explained that investor sentiment has soured recently, and both companies need to post impressive financial results for the first half of FY22 in order to halt this trend.

Both companies, however, are expected to post losses, featuring on Morgans’ list of Australian financial services firms whose “earnings visibility remains poor”.

This follows the US Consumer ­Financial Protection Bureau’s investigation into five global BNPL companies, which commenced last month.

Morgans lowered the price target on Afterpay to $91.49, from $132, a drop of 31 per cent. It lowered expectations for Zip by roughly 10 per cent.

“The sector is suddenly unloved by investors, so solid 1H22 results are required to change sentiment,” wrote Coles.

“We expect strong revenue growth for Afterpay and Zip, but we still expect both stocks to report first-half losses.”

Morgans explains that “bad debt risks and an inability for Zip to reach profitability and ultimately become self-funding” has led to its drop from favour.

Results are due in February.