Economic indicators strongly suggest that the US is at risk of a recession.Investors are making a mistake by focusing more on the silver linings in the stock market than the storm clouds that are still looming, according to Morgan Stanley.this quarter impressed Wall Street so much that markets are now pricing in positive profit growth for the second half of the year, wrote Mike Wilson, the chief US equity strategist at Morgan Stanley, in an early May note.
"The driving force behind the resiliency in earnings revisions breadth is the expectation that an upward inflection in 2H '23 and '24 EPS growth will come to fruition," Wilson wrote. He added that there's also a growing confidence that companies can expand margins after cutting costs. Markets have effectively priced in a 5.5% increase in earnings revisions breadth since the start of the Q1 earnings season.But although Wilson acknowledged that Q1 results have been better than anticipated, he can't join his peers in calling for an earnings rebound, because the"While the quarter has been stronger than expected thus far, mentions of tougher macroeconomic conditions and overall caution remain prevalent," Wilson wrote.
However, the steady weakening of several economic indicators and surveys may call that theory into question. Wilson noted that one such gauge, the , has fallen further into negative territory, showing that durable goods spending and fixed investment is declining relative to demand. The DLI has fallen below zero in each of the last four recessions.If the economy continues to lose momentum, Morgan Stanley thinks corporations should be concerned about negative operating leverage, which is when sales fall faster than expenses. The firmDespite shaky fundamentals, Wilson pointed out that stock valuations are far from cheap.