Morgan Stanley U.S. equity strategist Michael Wilson sees equity returns for the remainder of 2022 as a race against time. In simple terms, the Federal Reserve needs to squash inflation before an economic slowdown forces corporate America to cut profit forecasts en masse.
Second, the U.S. home renovation trend is slowing, a sign that rising interest rates are threatening a housing industry that accounts for almost 20 per cent of gross domestic product. Black & Decker has already cut full-year profit guidance and Best Buy management noted a slowdown in consumer electronics.
These signs of slowing growth should be good for bond markets – lower growth expectations lead to lower bond yields, and bond prices climb. Indeed that was the case in July as the iShares Core U.S. Aggregate Bond ETF gained 2.5 per cent. Morgan Stanley expects that cuts to profit guidance will intensify in September and October this year as third quarter earnings disappoint and full year estimates can no longer be supported.