Morgan Stanley analysts have reiterated their cautious stance on U.S. stocks, warning that earnings expectations are too high. The analysts predict that the U.S. will avoid a recession, but they believe that the bond market is pricing in 100 bps of cuts starting in June. This has led to increased volatility in the bond market, and they argue that the stock market will follow suit.
Morgan Stanley’s analysts note that the stock market has become “dependent on company earnings guidance,” which is a cause for concern. In recent years, companies have been issuing optimistic earnings guidance, which has helped to prop up the stock market. However, this trend cannot continue indefinitely. At some point, earnings will have to match expectations, or the market will correct itself.
Earnings expectations are too optimistic
Morgan Stanley’s analysts believe that earnings expectations are too optimistic. They note that analysts are forecasting earnings growth of around 6% for 2023, but they believe that this is too high. The analysts predict that earnings growth will be closer to 4%, which is still a healthy rate, but not as high as some investors are expecting.
One reason for the high earnings expectations is the recent tax cuts, which have boosted corporate profits. However, the effects of these tax cuts are likely to be temporary, and earnings growth is likely to slow in the coming years. In addition, there are concerns about rising interest rates, which could increase borrowing costs for companies and put pressure on earnings.
The bond market is pricing in rate cuts
The bond market is currently pricing in 100 bps of rate cuts starting in June. This suggests that investors are worried about a slowdown in the economy, and they are expecting the Federal Reserve to cut rates in response. However, Morgan Stanley’s analysts believe that these rate cuts are unlikely to happen. They predict that the economy will continue to grow at a moderate pace, and the Fed will maintain its current policy of gradual rate hikes.
Despite these predictions, the bond market remains volatile, and this is having an impact on the stock market. Morgan Stanley’s analysts argue that the stock market is too reliant on earnings guidance, and it is vulnerable to any negative news or surprises. This makes it difficult for investors to navigate the market, and it highlights the importance of diversification and risk management.
In conclusion, Morgan Stanley’s warning on U.S. stocks is a reminder that the market is not immune to risks and uncertainties. Earnings expectations are high, and the bond market is pricing in rate cuts, but these may not come to pass. Investors should remain cautious and focus on long-term fundamentals, such as earnings growth, valuation, and diversification. While there may be short-term volatility, the market will ultimately reflect the underlying strength of the economy and corporate profits.