The Worst Outlook For Stocks We Have Ever Seen

Morgan Stanley’s runner-up in the “Biggest Wall Street Bear” category (to BofA’s Michael Hartnett whose weekly Flow Show doom and gloom is now a source of inspiration for bears everywhere) is out with his own weekly dose of pessimism and in his latest US Equity Strategy note, Morgan Stanley chief US equity strategist Michael Wilson writes that “Q1 earnings season will be more disappointing than thought” and that “inflation is no longer a net positive for earnings growth.”

Wilson, whose bio and message header speaks for itself, and hints that bulls are now “the greater fool”

… predicts that “earnings revisions will decelerate amid 1Q reporting season as the MS Business Conditions Index (a survey of industry analysts) just fell further and margin headwinds mount / are not fully reflected in consensus estimates. Stocks should discount this risk via the ERP channel.”

Worse, Wilson argues against of the most recurring (and perplexing) arguments spread by the bears, namely that inflation is actually positive for stocks – which it is, to a point –  and according to Wilson, that point has now been reached and writes that “inflation is no longer a net positive for earnings growth given the impact on costs that are now showing up in margins.”

Wilson also warns that 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, Wilson thinks 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.”

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In that regard, the strategist warns that the significant rise in back end rates is having a meaningful impact on interest rate sensitive areas of the economy and market, like housing.

In practical terms, this means bad Q1 earnings and even uglier earnings for the rest of the year. Indeed, Wilson warns that signs are emerging that Q1 earnings season may be more disappointing than thought… particularly from a guidance/forward estimate standpoint. Case in point, earnings revisions breadth for the S&P 500 has resumed its downtrend over the past 2 weeks and is once again approaching negative territory, while the Morgan Stanley Business Conditions Index (a survey of the bank’s industry analysts) fell to its lowest level since April of 2020, and echoing a warning he has frequently made in recent months, Wilson cautions that “margin expectations look overly optimistic for the balance of ’22given the myriad of cost pressures companies face.”



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