Morgan Stanley is making predictions in opposition to the conventional wisdom in the markets right now, forecasting that a sudden pullback in corporate earnings will crush any US rally in equities.
Instead of investing in US stocks, they are predicting that investors will be well served to move into equities in Japan, Taiwan, and South Korea, and take overweight positions in developed-market government bonds, such as long-dated Treasuries and the dollar.
The team of Morgan Stanley strategists led by Andrew Sheets predicts there will be a drop of roughly 16% in the earnings per share for equities in the S&P 500 this year. It makes for among the most bearish of predictions tracked by Bloomberg, and is in direct opposition to more bullish forecasts from such powerhouses as Goldman Sachs Group Inc., which is predicting mild growth.
In a note to clients released Sunday, Morgan Stanley analysts wrote, “We think that the downside risk to US earnings is now. While a deteriorating liquidity backdrop is likely to put downward pressure on equity valuations over the next three months, we also see EPS disappointment ahead as revenue growth slows and margins contract further.”
Morgan Stanley predicts that earnings per share for the S&P 500 will come in at $185, compared to the median prediction from other strategists of $206. The team of analysts also predicts that the gauge will end the year at 3,900, compared to a close on Friday of 4,282.37. Currently the benchmark sits on the cusp of a bull market after a 19.7% rally since its October low, as investor optimism over artificial intelligence stocks have overwhelmed both rate hikes by the Federal Reserve and concerns over a potential recession.
The bank’s strategists also recommend investors take positions in defensive stocks, developed-market Investment-grade bonds, and if investors are yield-hungry, additional tier-one securities (a type of subordinated bank debt), instead of high-yield bonds.
Other analysts are more optimistic than the team at Morgan Stanley. A team from Evercore ISI led by Julian Emanuel have seen their year-end target for the S&P 500 raised by 7.2% to 4,450. They noted that with inflation easing, it is likely there will be a pause by the FED, and that dollars, “delivered during the pandemic’s darkest days” will support stock prices.
In other predictions, Morgan Stanley strategists forecast that European stocks may fall up to 10% over the next few months, though downside risk is constrained because of attractive valuations. Also, although normally China bulls, they reduced their target for key Chinese stock indexes, due to delayed earnings recovery, a weaker outlook for the currency, and uncertainties on the geopolitical front.
