'Gradually, then suddenly.' Earnings expectations may be about to drop, says Morgan Stanley strategist.

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Morgan Stanley's Mike Wilson is worried that investors have waved an all-clear to fallout from the banking crisis.

What did we learn last week? Some big banks are holding up okay after last month’s tremors, thanks to rising rates. That, along with cooling inflation, helped the Dow industrials DJIA close out its longest weekly winning streak since October.

Will optimism hold as earnings season gets fully under way this week and is banking stress done? Our call of the day, from Morgan Stanley’s chief U.S. equity strategist Mike Wilson, warns of a long shadow cast by March stress, despite a mostly upbeat stock market. He uses a quote from one of Ernest Hemingway’s novels to get his point across. In “The Sun Also Rises,” a character, asked how he went bankrupt, responds: “Two ways…Gradually, then suddenly.” Last month’s bank failures were blamed on a gradual build up of risk from long-duration Treasury holdings and concentrated deposit over the past year that suddenly accelerated, noted Wilson. And as most didn’t see those coming, investors need to stay alert for more fallout, he warns.

“The gradually eroding margins to date have been mostly a function of bloated cost structures. If/when revenues begin to disappoint, that margin degradation can be much more sudden, and that’s when the market can suddenly get in front of the earnings decline we are forecasting, too,” he said. Prometheus Biosciences RXDX stock is soaring 70% after pharma group Merck MRK said it would buy the clinical-stage biotech company for $200 a share, or about $10.8 billion. Merck shares are down slightly.

The Empire State manufacturing index for April is due at 8:30 a.m., followed by a home builder confidence index at 10 a.m. and a speech by Richmond Fed President Tom Barkin. House Speaker Kevin McCarthy is due to make remarks at the New York Stock Exchange on Monday, where he’s expected to focus on the debt limit.

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But someone I respect more than Wilson said the opposite? All these talking heads... go figure.

But as long as those ESG scores are looking good, that’s all that matters. It’s what’s really important to the shareholders

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