'Don't trust the strong rally': Morgan Stanley warns stocks aren't out of the woods just yet

The stock market's rally so far this year shouldn't be trusted, Morgan Stanley said in a new report.Watch the major US markets trade liveStocks in the US have enjoyed a dramatic, V-shaped recovery since the depths of the late-December sell-off. TheBut the gains have come amid not only disappointing corporate results, but also, said Morgan Stanley's equity-strategy team. And that's reason enough to expect a treacherous road ahead.

"The S&P 500 is down 7% from its highs, about the same as CY19 EPS forecasts," a team led by Michael Wilson, the firm's chief US equity strategist and chief investment officer, wrote in a note to clients out Monday."Evidence grows that these forecasts have more downside risk."Consensus earnings-per-share estimates still have room to fall another 4% to 5%, which could give way to a correction below the 2,600 mark , the firm said.

"We note that the last time the market saw guidance dips being bought in this way was around guides for 1Q15, a period which ultimately did not reflect the trough for earnings revisions." Last fall, the firm began calling for an earnings recession, and now expects stocks to fall just over 1% by year-end, to its S&P 500 price target of 2,750. Morgan Stanley's earnings-recession call is mostly borne from the view that the"business/profits cycle has run its course and was actually truncated by the fiscal stimulus enacted in late 2017.

"The bottom line for us is that the earnings recession is real and it's broader than the one we experienced in 2015-16," Wilson and his team wrote."It's also happening at a time when the economy has much less slack. This is leading to more margin pressure than what companies were prepared for when we entered 2018."

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