Stocks are trading oddly well into this earnings season, but that could pose a near-term risk to equities, warns Morgan Stanley’s Wilson

A surprisingly good start for the U.S. stock market into the first-quarter earnings season poses a near-term headwind for equities given the pessimistic outlook on earnings growth and the Federal Reserve’s monetary policy, according to Morgan Stanley’s Michael Wilson.

In One Chart: The stock market just saw the biggest rally into an earnings season since 2009. Now what? “It is not surprising that investors have been unwilling to sell into 1Q results as they believe this is as bad as it gets. We would agree with that conclusion if we believed the consensus forecasts,” wrote strategists in a Monday note. “Unfortunately, our forecasts are more pessimistic, and we don’t expect the trough rate of change EPS growth quarter until 3Q or 4Q.”

However, while the containment of the regional banking stress is a positive catalyst to drive stocks higher, it also suggests there’s no need for the Federal Reserve to relax monetary policy any further — “via both the liquidity channel and via the rates channel as the cuts currently priced in the bond market for the second half of 2023 may begin to be priced out,” said Wilson.

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