Morgan Stanley: Hope You Sold the Stock Rally, It Gets Worse From Here

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via CNBC:

  • The investment bank projected that full-year earnings per share forecasts for S&P 500 companies are likely to further fall between 4 percent and 5 percent.
  • Forecasts for 2019 S&P 500 earnings per share growth are already down 6 percent from their peak in September, and Morgan Stanley thinks investors aren’t out of the woods yet.
  • “Earnings revision breadth has been some of the worst we have ever witnessed with both sales and margin guidance coming down across all sectors,” Morgan Stanley’s chief U.S. equity strategist, Michael Wilson, says.

The stock market correction likely isn’t over, and evidence is mounting that there is more downside risk ahead for investors, according to Morgan Stanley.

The investment bank projected that full-year earnings per share forecasts for S&P 500 companies are likely to further fall between 4 percent and 5 percent, which could put added pressure on the index. The S&P 500 has gained more than 17 percent since hitting a 52-week low on Christmas Eve, boosted by progress in U.S.-China trade negotiations and signs that the Federal Reserve will continue to be patient on any future interest rate hikes.

But forecasts for 2019 S&P 500 earnings per share growth are already down 6 percent from their peak in September, and Morgan Stanley thinks investors aren’t out of the woods yet.

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FactSet, Morgan Stanley Research

“Earnings revision breadth has been some of the worst we have ever witnessed with both sales and margin guidance coming down across all sectors,” Morgan Stanley’s chief U.S. equity strategist, Michael Wilson, said in a note. “The earnings recession is real and broader than the one we experienced in 2015-2016. It’s also happening at a time when the economy has much less slack.”

Beginning in mid-2015, corporate profits among S&P 500 companies shrunk for five consecutive quarters. During that period, the index suffered two 10 percent corrections, set off in large part due to plunging oil prices.

Earnings are expected to contract in the first quarter of this year, and, while a small increase is expected for the coming quarter, Wilson worries margin pressures could lead to more disappointment ahead as the year drags on. Just last month, Wilson lowered his 2019 S&P 500 earnings per share growth expectation to 1 percent from 4.3 percent based on the many downward profit revisions during the fourth-quarter reporting season.

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Two recent economic data points last week amplified those concerns. Job cuts surged in February to the highest monthly total since July 2015, followed up by U.S. government employment data that badly missed expectations. Nonfarm payrolls increased by just 20,000 in February — the worst month for job creation since September 2017….

 

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