Morgan Stanley’s Wilson says profit estimates are too high
New York | The odds of a year-end rally in US stocks are fading as investors face a multitude of risks from elevated profit estimates to the Federal Reserve’s policy tightening, Morgan Stanley’s Michael Wilson said.
The strategist – among the most bearish voices on US stocks – said he “would not be surprised” to see further declines in the S&P 500 with “earnings expectations likely too high for the fourth quarter and 2024 and policy tightening likely to be felt from both a monetary and fiscal standpoint”.
Morgan Stanley’s Mike Wilson expects the S&P 500 to end the year at 3900. Bloomberg
Wall Street analysts expect S&P 500 companies to post an earnings decline of 1.1 per cent for the third quarter, before a rebound of 5.2 per cent in the October-December period, data shows. Forward 12-month estimates have also risen close to a record high.
Mr Wilson’s pessimistic view has been somewhat vindicated, with the S&P 500 tracking its third straight monthly decline on worries of higher-for-longer interest rates. On Friday, the benchmark closed at 4224 points, below its 200-day moving average for the first time since March.
That is considered a key technical support level and used by traders to assess whether the longer-term trend is up or down.
The S&P 500 briefly fell below 4200 in the first half hour of trade on Monday. It was 0.4 per cent higher to 4241 at midday after the early market swoon reversed.
The combined outlook for earnings, valuations and policy means that the S&P 500 “will have a hard time” getting back above 4300 to 4400 points – which were previously considered levels of tactical support, Mr Wilson said. The strategist has a year-end target of 3900 – nearly 8 per cent below current levels.
The chorus of Wall Street strategists warning about a subdued end to the year has increased recently as stocks face renewed geopolitical risks. The macroeconomic uncertainty as well as US bond yields at 5 per cent have overshadowed the third-quarter reporting season, causing S&P 500 constituents to increasingly move in unison.
Lacklustre reception
Early reactions to earnings are also lacklustre. With about a fifth of S&P 500 members having reported, companies that lagged behind analysts’ estimates on the earnings-per-share metric have seen their stock underperform the benchmark index by a median of 3.7 per cent on the day of results, data shows. That is the worst performance in the data’s history going back to the second quarter of 2019.
Even companies beating estimates have trailed the S&P 500 by 0.6 per cent – the first such showing since the fourth quarter of 2020.
JPMorgan Chase strategist Mislav Matejka sees further pressure on global stocks from an expected strengthening in the US dollar, he wrote in a note dated October 23.
At RBC Capital Markets, strategist Lori Calvasina said, “The outlook has become cloudier, and we don’t think the pause in the S&P 500 rally is done yet”.
Additionally, large-cap growth stocks are ripe for near-term declines as they’ve become “over owned and overvalued”, while balance sheet concerns, rising bond yields and economic gloom are hitting small-cap companies, she said.
“The broader market, the growth trade and the small-cap trade are unlikely to find their footing again until the recent surge in bond yields comes to an end,” Ms Calvasina wrote in a note.
Bloomberg
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