Equity strategists at Wall Street’s top banks are split on whether Corporate America can deliver on robust earnings forecasts for this year.
While Morgan Stanley’s Michael Wilson said he expects profit growth to improve over 2024 and 2025 as the economy strengthens, his counterpart at JPMorgan Chase & Co. argues that hot inflation, a stronger dollar and a recent rise in geopolitical tensions are clouding the outlook.
“Investors are expecting S&P 500 earnings-per-share to accelerate by almost 20% by the fourth quarter compared to the projected first-quarter levels,” JPMorgan strategist Mislav Matejka wrote in a note. “That hurdle rate is too steep in our opinion.”
The focus on earnings comes at a time when the rally in US stocks has been derailed by a jump in bond yields. After notching several record highs in the first quarter, the S&P 500 Index has slumped more than 5% in April following signals that the Federal Reserve is prepared to hold interest rates higher for longer.
Both Wilson and Matejka say that the pressure will be on earnings, rather than rates, to drive further gains from here.
However, Matejka said the market was still showing some “complacency” as it isn’t pricing in a “meaningful risk of a downturn over the next year anymore.” The strategist has remained among the more bearish voices on US stocks this year.
Wilson — who was among the biggest bears in 2023 despite a 24% rally in the S&P 500 — has taken a more balanced tone on equities. He said a pickup in business activity surveys, backed by new orders, “validates continued earnings expansion ahead.”
“With that in mind, we think cautious optimism is still warranted,” Wilson said. Still, he expects most of the earnings growth to come through later in the year. In the short term, the strategist said the S&P 500 faces declines of up to 5% if bond yields remained at current levels.
Meanwhile, Bloomberg’s latest Markets Live Pulse survey showed participants expect upbeat US earnings to pull the S&P 500 out of its latest morass. With reporting season kicking into high gear this week with results from Big Tech giants, nearly two-thirds of 409 respondents said they expect earnings to give the US equity benchmark a boost.
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