Key risk for stocks is not banks but earnings growth estimates – MS

By Senad Karaahmetovic 

Morgan Stanley strategists weighed in on the latest developments pertaining to the collapse of Silicon Valley Bank.

The strategists urge investors to focus on the real story for equity markets: Earnings growth estimates.

“Earnings growth expectations remain materially too high, and markets are now likely to price that risk more quickly,” they warn in a client note.

Fed’s move to backstop all insured deposits will help prevent bank runs, but they warn that it does little to change the bigger picture – slowing growth.

“In our view, the cost of deposits has been on the rise for months and the events of last week are likely to put further upward pressure on those costs. Furthermore, Senior Loan Officer Surveys on lending standards have tightened considerably over the past 6 months and should only tighten further,” the strategists added.

They see potential for significant downside from current levels in US equities.

“Our very much out of consensus view on earnings is now likely to get properly priced via the Equity Risk Premium which has remained well below fair value. If such a period of adjustment has begun, one should expect at least a 200bps rise in the ERP from the recent lows of 150bps. Such a rise would take the NTM P/E to 13-15x depending on how Treasury yields (and the Fed) react to this growth scare.”