Mar 27, 2023
Morgan Stanley Strategist Says Earnings Are Next Risk to Equities
(Bloomberg) -- Morgan Stanley’s Michael Wilson — among the most prominent bearish voices on US stocks — says turmoil in the banking sector has left earnings outlooks too high, putting sanguine stock markets at risk of sharp declines.
“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Wilson wrote in a note on Monday.
Financials and consumer retailers are among sectors that have already started to reprice, with valuations declining enough to present investment opportunities, Wilson said in an interview with Bloomberg Surveillence on Monday.
“We’re looking for opportunities at the stock level, but at the index level, it does not look attractive to us,” he said.
While Wilson, the bank’s top equity strategist, predicts stocks will head lower as earnings estimates and valuations continue to fall, he does not anticipate equities to hold at their lows for long.
“Whatever we’re going to get here in the next three to six months in terms of finally resetting the valuations appropriately and getting estimates down, I don’t think we’re going to stay at very, very low price levels for a very long time,” Wilson said. “We’re not in the camp that we’re in a secular, structural bear market — this is a cyclical bear market that has some completion to it.
The strategist — who ranked No. 1 in last year’s Institutional Investor survey after he correctly predicted the selloff in stocks — attributed the heightened risk of equities repricing to the divergence in stock and bond market action this month. Whereas bond volatility has spiked as investors priced in a potential recession following the collapse of a slate of regional US lenders, equities have recovered losses on bets of intervention from policy makers. The S&P 500 is on course to gain for a second straight quarter.
Focus now turns to the first-quarter earnings season, which kicks off in mid-April. The drop in profit estimates so far this year has matched the declines seen in the previous two quarters, suggesting earnings haven’t bottomed yet, Wilson said. Given expectations of a sharp profit recovery in the second half, the threat to margins from elevated inflation is still “underappreciated,” he added.
JPMorgan Chase & Co. strategists also said that the first quarter likely marked “the high point” for stocks this year, and that they don’t expect a “fundamental improvement in equities risk-reward” until the Federal Reserve signals rate cuts. Moreover, after both bonds and stocks moved in the same direction last year, an unusual occurrence, rising recession odds this year will likely invert that relationship again, the team led by Mislav Matejka said.
--With assistance from Farah Elbahrawy.
(Adds comments on sectors repricing from BTV interview starting in third paragraph.)
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