(Bloomberg) – Strategists at Morgan Stanley believe a sudden drop in corporate earnings will slow the recovery in U.S. stocks, a forecast at odds with Wall Street estimates.
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Instead, they are bullish on equities in Japan, Taiwan and South Korea and recommend an overweight position in developed market government bonds, including long-dated government bonds, and the dollar.
According to strategists at Morgan Stanley, led by Andrew Sheets, the S&P 500’s earnings per share are expected to fall 16% this year. This is one of Bloomberg’s most pessimistic forecasts, and contrasts with optimistic forecasts from companies like Goldman Sachs Group Inc., which expect modest growth.
“We believe the downside risk to US earnings is now on,” analysts at Morgan Stanley wrote in a note released on Sunday. “While a deteriorating liquidity environment is likely to put downward pressure on equity valuations over the next three months, we also see disappointing EPS disappointment as revenue growth slows and margins continue to shrink.”
Morgan Stanley expects S&P 500 earnings per share to come in at $185, compared to a median forecast of $206 from strategists. The Sheets team sees the year-end reading at 3,900, while Friday’s close was 4,282.37. The benchmark is on the brink of a bull market, having risen 19.7% from an October low and gaining on enthusiasm for artificial intelligence stocks despite Federal Reserve rate hikes and fears of a possible recession.
Other recommendations from the bank’s strategists include defensive stocks, investment-grade developed-market bonds and, for yield-seeking investors, a preference for additional Tier 1 securities – a type of subordinated bank debt – over high-yield bonds.
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Of course, some strategists are more optimistic than Morgan Stanley’s. An Evercore ISI team led by Julian Emanuel increased its year-end S&P 500 target by 7.2% to 4,450. They said that easing inflation was likely to signal a Fed pause and that the “dollars delivered in the darkest days of the pandemic” would support the stock market.
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