Earnings could surprise to the downside through year-end on weakening economic conditions, says Morgan Stanley’s Mike Wilson

Softer U.S. economic data may point to weaker earnings over the next several months as corporates’ pricing power will erode as inflation cools, while labor costs continue to be a headwind for private sector profits, according to Morgan Stanley’s Michael Wilson.

Among 85% of S&P 500 SPX companies reporting actual results for the first quarter of 2023, 79% of those companies have reported a positive earnings-per-share which beats Wall Street estimates, while 75% of them have reported a positive revenue surprise, according to FactSet data. That is a “better guidance outcome than we expected coming into the quarter and a different one than what we have observed the past few quarters,” said Wilson.

However, much of the macro data may be providing a “false signal” as leading indicators point to downward trends in EPS surprise and margins over the coming months, said Wilson.

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