Don’t expect this corporate earnings season to fuel fresh gains in the US stock market.
That’s the view of a growing chorus of Wall Street strategists, with Morgan Stanley’s Michael Wilson — one of the most bearish voices on stocks — becoming the latest to warn that company forecasts will matter more than usual this time around given elevated equity valuations, higher interest rates and dwindling liquidity.
“With second-quarter earnings beginning this week, ‘better than feared’ likely isn’t going to cut it anymore,” Wilson wrote in a note.
The strategist — whose pessimistic view on stocks has yet to materialize this year — said he expects further cuts to analysts’ earnings projections in the second half of the year, “so the key for stocks will come via company guidance for the out quarter rather than the results themselves.”
US stocks rallied in the first half of 2023 on better-than-feared earnings and expectations of peaking rates, catching a majority of Wall Street strategists off guard in their projections for the year. But profit downgrades are picking up again, and investors are increasingly expecting a choppy outlook for stocks for the rest of the year. There’s early evidence of that playing out in July, with the S&P 500 posting a decline last week amid fears of a hawkish-for-longer Federal Reserve.
Bloomberg’s latest Markets Live Pulse survey also found that participants are bracing for profit warnings and higher interest rates to spark further declines in the S&P 500 this earnings season, which kicks off with reports from the big US banks on Friday. Overall, analysts expect second-quarter earnings to have fallen almost 9% — the biggest year-over-year decline since 2020, according to data compiled by Bloomberg Intelligence.
Meanwhile, the equity strategy team at Goldman Sachs Group Inc. said they expect US companies to “meet or exceed the low bar” set for the second quarter. However, they view analysts’ expectations of a rebound in profits in 2024 as “too optimistic.”
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