As earnings season kicks off, Morgan Stanley’s investment chief is warning clients that incoming reports will likely disappoint investors, pushing major stock indexes to two-year lows even if the economy ultimately avoids a recession—but on the bright side, the analyst foresees the bear market’s end could be in sight and may arrive as early as this quarter....
With consumer spending slowing down and high costs still cutting into profits, Wilson says an earnings recession is “imminent,” and that fourth-quarter profits set to be released in the coming weeks will disappoint investors, at least according to Morgan Stanley forecasts that are significantly lower than average analyst estimates.
The last two times the bank’s model predicted earnings so far below average forecasts , the S&P fell 34% and 49%, Wilson warns, noting this year’s rally looks particularly vulnerable since it’s been led by “low-quality, heavily shorted stocks”; meme stocks AMC and GameStop, for example, have surged 45% and 23%, respectively.
Morgan Stanley ultimately projects the S&P could tumble as much as 25% to a two-year low of 3,000 points as earnings season ramps up, but Wilson notes that once the quarterly reports reveal the extent of companies’ woes, the bear market will ultimately come to a close—either later this quarter or early in the second.
Despite being more bearish than most, Morgan Stanley isn't alone in warning the rallying market could be a head fake: Goldman Sachs analysts last week said the S&P will crater up to 22% this spring if the economy falls into a recession, and even if it doesn’t, they foresee the index falling another 10% before ending the year roughly flat at current levels.“When costs are growing faster than sales, profit margins erode.