Weaker corporate earnings forecasts could weigh on U.S. stocks near-term, with Morgan Stanley strategists saying U.S. stocks could fall further before bottoming out in the second-quarter earnings season.
“In the absence of a clear shock like a recession, companies slow down and move lower,” strategists led by Michael Wilson wrote in a note Monday. “This time should be no different, meaning shares can Maintain current levels in the second quarter earnings season, when the next downtrend could begin and end.”
One of Wall Street’s most prominent bears, Wilson correctly predicted the recent market sell-off amid fears that Fed tightening could tip the economy into recession. Friday’s strong jobs report added to those concerns, sending the S&P 500 down for an eighth week in nine.
Wilson predicts the U.S. benchmark will trade around 3,400 through mid-to-late August, down 17% from its last close. The top 5% of stocks in the S&P 500 still trade at a 40% premium to their median pre-pandemic level, compared with 17% for the broader index, he said.
“This could also represent a downside scenario where these stocks could be the last shoes to fall before we exit the current bear market,” the strategist wrote in a note.
Bear rally
Bank of America strategists, including Michael Hartnett, also said stocks were now in a bear market rally, adding that they would short the S&P 500 above 4,400 — about 7.1% above Friday’s close.
Not everyone is pessimistic, though. JPMorgan strategists, including Mislav Matejka, remain bullish on stocks, saying “the fundamental risk/reward trade-off for stocks is likely to improve as we head into the second half of the year.”
At an industry level in the U.S., Morgan Stanley’s Wilson said estimates for grocery and staple retail sales had “collapsed” over the past four weeks. Forecasts for consumer discretionary and tech hardware also softened, he said, while real estate saw the biggest revisions over the past month.
Risks to European corporate earnings are also increasing, according to Sanford C. Bernstein strategists Sarah McCarthy and Mark Diver, who said on Monday that if consumers If growth in demand and sales cannot sustainably offset high inflation, then profit margins could shrink significantly.
