Profit forecasts are too high, says Morgan Stanley

Profit forecasts are too high, says Morgan Stanley
Wall Street strategist Michael Wilson says Q3 and Q4 earnings may disappoint.
OCT 23, 2023
By  Bloomberg

The odds of a year-end rally in US stocks are fading as investors face a multitude of risks from elevated profit estimates to the Federal Reserve’s policy tightening, according to Morgan Stanley’s Michael Wilson.

The strategist — among the most bearish voices on US stocks — said he “would not be surprised” to see further declines in the S&P 500 with “earnings expectations likely too high for the fourth quarter and 2024, and policy tightening likely to be felt from both a monetary and fiscal standpoint.”

Wall Street analysts expect S&P 500 firms to post an earnings decline of 1.1% for the third quarter, before a rebound of 5.2% in the October-December period, according to data compiled by Bloomberg Intelligence. Forward 12-month estimates have also risen close to a record high.

Wilson’s pessimistic view has been somewhat vindicated, with the S&P 500 tracking its third straight monthly decline on worries of higher-for-longer interest rates. On Friday, the benchmark closed at 4,224 points, below its 200-day moving average for the first time since March. That’s considered a key technical support level and used by traders to assess whether the longer-term trend is up or down.

The combined outlook for earnings, valuations and policy means that the S&P 500 “will have a hard time” getting back above 4,300 to 4,400 points — which were previously considered levels of tactical support, Wilson said. The strategist has a year-end target of 3,900 — nearly 8% below current levels.

The chorus of Wall Street strategists warning about a subdued end to the year has grown in recent weeks as stocks also face renewed geopolitical risks. The macroeconomic uncertainty as well as US bond yields nearing 5% have overshadowed the third-quarter reporting season, causing S&P 500 constituents to increasingly move in unison. 

JPMorgan Chase & Co. strategist Mislav Matejka sees further pressure on global stocks from an expected strengthening in the dollar, he wrote in a note dated Oct. 23. 

At RBC Capital Markets LLC, strategist Lori Calvasina also said the “outlook has become cloudier and we don’t think the pause in the S&P 500 rally is done yet.” Additionally, large-cap growth stocks are ripe for near-term declines as they’ve become “over owned and overvalued,” while balance sheet concerns, rising bond yields and economic gloom are hitting small-cap firms, she said. 

“The broader market, the growth trade and the small-cap trade are unlikely to find their footing again until the recent surge in bond yields comes to an end,” Calvasina wrote in a note.

Latest News

Morningstar forges fintech partnership with SS&C
Morningstar forges fintech partnership with SS&C

The alliance will give Black Diamond users the first chance to use a newly launched advisory suite as Morningstar shutters a legacy advisor platform.

Passive pressures will drive continued mutual fund consolidation into 2030, PWC says
Passive pressures will drive continued mutual fund consolidation into 2030, PWC says

A continuing shift to low fees, growing dominance of mega-managers, and the clamor for product innovation are set to reshape the landscape.

Amid festering trade tensions, Grantham's GMO launches China-dodging ETF
Amid festering trade tensions, Grantham's GMO launches China-dodging ETF

Notwithstanding a recent tech-driven rebound in Chinese markets, five- and 10-year lookbacks suggest dropping the emerging-market giant is still the winning strategy.

Finra sanctions smoothie-throwing broker over alleged cash reporting failures
Finra sanctions smoothie-throwing broker over alleged cash reporting failures

But the Finra panel's decision against James Iannazzo was not unanimous.

Student debt has a chilling effect on employees' retirement planning
Student debt has a chilling effect on employees' retirement planning

A new study highlights how debt-saddled public and private workers are forced to focus on shorter-term investments and immediate financial concerns.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.