Morgan Stanley Strategist Says Earnings Are Next Risk to Equities

(Bloomberg) — Morgan Stanley’s Michael Wilson — among the most prominent bearish voices on US stocks — says turmoil in the banking sector has left earnings guidance looking too high, putting sanguine stock markets at risk of sharp declines.

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“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Wilson wrote in a note on Monday.

The strategist — who ranked No. 1 in last year’s Institutional Investor survey after he correctly predicted the selloff in stocks — said that’s partly due to the divergence in stock and bond market action this month. Whereas bond volatility has spiked as investors priced in a potential recession following the collapse of a slate of regional US lenders, equities have recovered losses on bets of intervention from policy makers. The S&P 500 is on course to gain for a second straight quarter.

Focus now turns to the first-quarter earnings season, which kicks off in mid-April. The drop in profit estimates so far this year has matched the declines seen in the previous two quarters, suggesting earnings haven’t bottomed yet, Wilson said. Given expectations of a sharp profit recovery in the second half, the threat to margins from elevated inflation is still “underappreciated,” he added.

JPMorgan Chase & Co. strategists also said that the first quarter likely marked “the high point” for stocks this year, and that they don’t expect a “fundamental improvement in equities risk-reward” until the Federal Reserve signals rate cuts. Moreover, after both bonds and stocks moved in the same direction last year, an unusual occurrence, rising recession odds this year will likely invert that relationship again, the team led by Mislav Matejka said.

–With assistance from Farah Elbahrawy.