Wall Street’s “timid approach to earnings revisions sets up risks” for the U.S. stock market, which already is expensive, according to the chief investment officer of Morgan Stanley’s wealth-management business.
“We estimate 2023 consensus earnings expectations are 10% to 20% too high,” she wrote. “Based on our forecast, stocks sell at a relatively risky 20 times earnings.” The S&P 500, which is a capitalization-weighted index of large-cap stocks in the U.S., is currently trading around “an already expensive 17 times forward earnings,” Shalett said. Based on Morgan’s Stanley’s below-consensus earnings forecast of $195 per share for the index, “the implied forward multiple rises to 20.”
But while equities appear “overpriced,” bond yields are “attractive,” she wrote. “History suggests that as Fed hiking cycles mature and yield curves reach maximum inversion — which may have occurred last week — investors should favor bonds over stocks.” Historically, the inversion of 10-year and 2-year yields in the U.S. Treasury market has preceded a recession.