Earnings estimates look unusually gloomy, warns Morgan Stanley

by Farah Elbahrawy

Analysts are busy slashing earnings estimates in the US due to the risk of a severe economic slowdown, according to Morgan Stanley’s Michael Wilson.

The S&P 500’s earnings revisions breadth — or analyst estimates upgrades versus downgrades — is now at levels rarely witnessed, approaching downside extremes in the absence of a recession, the strategist said.

“Companies face more uncertainty than they have since the early days of the pandemic,” he wrote in a note. “This is weighing on earnings revisions.”

Analysts expectations have come down significantly. They cut their estimates for first-quarter S&P 500 earnings-per-share growth to 6.9% from 11.4% at the start of the year, according to data compiled by Bloomberg Intelligence.

Wilson points out that earnings revision breadth peaked almost a year ago. That’s well before the S&P 500 reached its most recent record, supporting his view that the correction is far more advanced than acknowledged by the consensus.

“This is why we are now more interested in looking at stocks/sectors that may have discounted a mild recession already even if the broader index has not,” he said. “In short, if a recession is averted, markets likely made their lows two weeks ago. If not, the S&P 500 will likely take those lows out.”

The strategist sees 5,000 to 5,500 as the likely range for the S&P 500 until the risk of a recession is either confirmed or refuted by hard data, with jobs reports being the most important. The index closed around the middle of this range, near 5,280, on Friday.

US equities have sold off this year over concerns that President Donald Trump’s proposed tariffs will hurt the economy while stoking inflation. The ongoing earnings season has done little to lift sentiment, and investors are increasingly looking for opportunities outside the US. The MSCI World Index of developed countries excluding the US has climbed over 6% this year so far, while the S&P 500 is trading 10% lower.

Wilson said international earnings revisions are now following the US lower at an accelerating rate. The adjustment looks more advanced for Europe and China, he noted.

“The relative performance of the US versus Europe can now swing back in favor of the US even in a down market,” he wrote.

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