A 16% earnings slump is set to derail the stocks rally: Morgan Stanley

US stocks have advanced so far this year but a slump in corporate earnings will stop the rally in its tracks by the end of the year, according to a team of Morgan Stanley strategists.

Earnings per share for the S&P 500 will fall 16% in 2023 as revenue growth slows and margins further contract, according to Andrew Sheets, the firm's chief cross-asset strategist and his team, as reported by"While a deteriorating liquidity backdrop is likely to put downward pressure on equity valuations over the next three months, we also see EPS disappointment ahead as revenue growth slows and margins contract further," the strategists said in a Sunday note, per Bloomberg.

US earnings now face downside risk, Sheet's team said, noting that the firm expects S&P 500 earnings per share to be $185, which is less than Wall Street's average prediction of $206. Morgan Stanley anticipates the key index to fall to 3,900 by the end of the year, per Bloomberg. The S&P 500 has gained nearly 12% so far this year to 4,282 as of Friday's close on the back of an artificial intelligence-fueled rally. The gains come despite the Federal Reserve's aggressive interest rate hikes to tame high inflation, as well as fears of a potential economic downturn.

Morgan Stanley's forecast is among Wall Street's more bearish ones, according to Bloomberg estimates, and contrasts with bullish predictions from Goldman Sachs and others who are more optimistic and think mild growth is in the cards.

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