Earnings Recession Ends, Economic Recession Looms
Despite the end of the earnings recession, the economy is showing signs of slowing down, indicating an impending economic recession that cannot be avoided.
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Earnings Recession
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Morgan Stanley strategist predicts short-lived rally
Morgan Stanley strategist Mike Wilson believes that last week's stock market rally was mainly driven by the fall in Treasury yields, rather than any significant positive factors. Wilson points to weak economic data and negative earnings revision breadth as indicators that the earnings recession is not yet over. He predicts that the rally will fizzle out in the next week or two as it becomes clear that the growth picture does not support further Fed cuts or a significant acceleration in earnings per share growth. Wilson suggests that adding additional risk at current levels is less attractive than fixed-income alternatives.
Stock Prices Soar as Key Driver Surges: Morning Brief
Despite market instability, corporate earnings, which are the most important long-term driver of stock prices, have been improving. Analyst estimates for the third quarter, fourth quarter, and remainder of 2023, as well as 2024 full-year forecasts, have been raised during July and August, contrary to the usual trend of downward revisions. While earnings for S&P 500 companies have declined in Q2, analysts are growing more optimistic about the outlook for the rest of this year and into 2024.
Earnings Recession Deepens as Investors Brace for Second Quarter Reports
The second quarter earnings season is expected to bring a third consecutive decline in earnings for S&P 500 companies, with estimates projecting a 7% decrease in earnings per share compared to the same quarter last year. Consumer Discretionary and Communications Services are the only sectors expected to see earnings growth. Additionally, there is no year-over-year revenue growth expected for the first time in 10 quarters. The impact of AI on profits, the health of the consumer, and the state of the financial system will be key themes to watch. While there is a "low bar" for earnings, some tech stocks face high expectations following Nvidia's AI surge last quarter. However, there is optimism that this quarter might mark the bottom for year-over-year earnings comparisons.
Morgan Stanley predicts earnings drop and potential end to stock rally.
Morgan Stanley predicts a "meaningful" earnings recession this year, with earnings declining 16% by the end of the year before experiencing a "sharp rebound" in 2024. The firm sees the S&P 500 falling to 3,900 by year end, and the S&P 500 will produce earnings per share of $185. Morgan Stanley's 2023 S&P 500 earnings per share target is 17% below market consensus. The equities team believes a cyclical bear market is coming and recommends defensive positioning in sectors and industry groups with reliable track records of outperformance late in the cycle/during earnings recessions.
Wall Street's Unloved Stock Rally Faces Earnings Wipe Out, Says Morgan Stanley.
Morgan Stanley's "Worried" Mike Wilson expects a significant earnings recession this year that has yet to be priced in by stock markets, despite the outperformance of AI players and some big tech names, Fed pivot fever, and hopes that the worst of an earnings recession is over. Wilson advises investors to stick to defensive characteristics, operational efficiency, and earnings stability. However, Morgan Stanley expects a 23% bounce in EPS growth in 2024 and 10% in 2025, as Fed policy turns more accommodative in 2024.
Stocks Rally as Dow Jones Gains and Musk Launches New AI Company
The S&P 500 and Dow Jones Industrial Average were flat in early afternoon trading, with the former facing resistance at the current level due to the risk of an earnings recession. Bank of America gained after strong earnings, while Goldman Sachs saw a decline in revenue. Bitcoin held steady after clearing a critical level last week, hitting the $30,000 mark for the first time since June 2022. Elon Musk has started a new AI rival company called X.ai, which plans to develop 'TruthGPT' to rival Google parent Alphabet, Microsoft, C3.ai, OpenAI, and DeepMind.
US Stock Market Rally at Risk, Warns Morgan Stanley and Strategist
Morgan Stanley's chief US equity strategist, Michael Wilson, warns that the US stock market's recent rally is likely to fizzle out due to higher interest rates taking a toll on the economy. Wilson believes that the Federal Reserve's aggressive tightening campaign could trigger other surprising problems, and investors are likely to face "more negative surprises" in the coming months. Wilson previously warned that the benchmark S&P will tumble about 20% over the course of the year due to an earnings recession and continued fallout from the banking crisis.
Experts Predict Significant Downside for S&P 500
Morgan Stanley's US chief equity strategist, Mike Wilson, predicts a downturn for US stocks, with the S&P 500 falling over 20% later this year due to an earnings recession and banking sector turmoil. Wilson expects the gauge to hit a trough of 3,000-3,300 for this cycle, representing a decline of more than 20%. JPMorgan, Citigroup, and Wells Fargo are kicking off earnings season on Friday, and analysts expect US corporate profits to post their biggest decline since the beginning of the COVID-19 pandemic in 2020.
Earnings season brings uncertainty to stock market.
Analysts expect corporate America to be in an earnings recession after Q1 earnings season, with earnings per share for S&P 500 companies expected to drop 6.8% from the prior year. This follows a 4.6% decline in Q4 2022, pushing profits for the market's biggest companies into a recession. The news isn't expected to get much better in Q2, with expectations for another 4.6% drop. Some strategists believe the market is still pricing in a "no landing" scenario, but expect investors to eventually heed the warnings being sent by corporate bottom lines.