Morgan Stanley Sees Earnings Risk Ahead, Says High Inflation is Forcing Fed to Be ‘Max Hawkish’
2022.04.18 14:46
Morgan Stanley Sees Earnings Risk Ahead, Says High Inflation is Forcing Fed to Be ‘Max Hawkish’
Morgan Stanley’s top equity strategist Michael Wilson has once again reiterated his bearish stance on US equities as investors shift their focus towards the Q1 earnings season.
Wilson and his team argue that earnings revisions will decelerate amid the 1Q reporting season amid margin headwinds that are mounting and still not fully reflected in consensus estimates.
“While we appreciate how inflation can be good for nominal GDP and therefore revenue growth, we think inflation is no longer a net positive for earnings growth given the impact on costs that are now showing up in margins. Secondarily, the war in Ukraine has led to a spike in energy and food costs which serve as nothing more than a tax on a consumer that is already struggling with high inflation. In other words, we think the positive effects of inflation on earnings growth have reached their peak and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to remain max hawkish,” Wilson said in a client note.
The strategist is especially concerned about guidances with margin expectations looking “overly optimistic.” On the other hand, he notes that the Morgan Stanley (NYSE:MS) Business Conditions Index (a survey of our industry analysts) fell to its lowest level since April of 2020.
“We think the downtrend is likely to take revisions breadth outright negative, and potentially well into negative territory (similar to what we saw in 2015-2016—a growth consolidation but not an economic recession). This is typically a sign that forward earnings estimates are going to decelerate or at least consolidate sideways,” Wilson added.
Wilson previously urged investors to stay defensively positioned as THE low in equities is yet to be seen.
By Senad Karaahmetovic
