A double whammy of economic uncertainty and a weak period for corporate earnings forecasts is likely to cap stock market gains, according to Morgan Stanley’s Michael Wilson.
The strategist — among the most notable bearish voices on US equities until last year — said he expects the S&P 500 Index to trade in a range of 5,000 to 5,400 points as macroeconomic data flash no clear signals over the short term. The upper end of that range implies gains of just 1% from current levels, while the lower end would mean a decline of 6.4%.
In addition, analysts’ profit downgrades are expected to outnumber upgrades in line with seasonal weakness, “which is one reason why the third quarter is typically the most challenging for stocks,” Wilson wrote in a note.
US stocks have been roiled in the past month by worries that the Federal Reserve had been too slow to cut interest rates in time to prevent a recession. While the benchmark S&P 500 has recouped most declines from last week, it remains nearly 6% below a mid-July record high. Attention now turns to Wednesday’s key consumer prices report.
Growth fears took the shine off an upbeat second-quarter earnings season. S&P 500 companies are on track to post a 13% jump in profits, the strongest gain since 2021. Still, the share of firms beating sales estimates is the smallest since 2019, fueling concerns about the resilience of profit margins.
In the note, Wilson said that while bond markets had moved to price in a Fed that is “behind the curve,” equity valuations were still not fully reflecting that risk. The strategist reiterated his preference for so-called defensive stocks with a robust earnings outlook and strong balance sheets.
His counterparts at JPMorgan Chase & Co. — among the last remaining pessimistic voices on stocks this year — also said they expect a mixed outlook for stocks through the summer months.
The “Fed will start cutting, but this might not drive a sustained leg higher, as the cuts might be seen as reactive, and behind the curve,” the team led by Mislav Matejka wrote in a note.
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