Morgan Stanley has some bad news for investors comforted by earnings
Analysts forecast negative profit growth for U.S. firms in January-March period
Underneath this buoyant earnings season has been a deteriorating trend that Morgan Stanley says is hard to stop.
That’s Wall Street’s 2019 forecasts for S&P 500 corporate profits, according to Mike Wilson, the firm’s chief U.S. equity strategist. At 5.4 per cent, the expected rate of growth among analysts tracked by Bloomberg has come down from 7.7 per cent in January. That’s still too high, warned Wilson, who just cut his growth prediction to one per cent. The strategist, who had previously called for a 4.3-percent increase for the full year, said the current reporting season has validated his forecast for two consecutive quarters of earnings declines. While the S&P 500 has climbed almost more than four per cent over the past four weeks, poised for the best return during any earnings periods since 2014, analysts have been busy trimming their estimates.
As a result, corporate America is expected to head for negative profit growth for the first time in three years during the JanuaryMarch period.
“Our earnings recession call is playing out even faster than we expected,” Wilson wrote in a note to clients. “Earnings recession is here.”
While Wilson turned less optimistic on corporate earnings, he’s sticking to his forecast for the S&P 500 to end the year at 2,750 because lower interest rates support equity valuations. Further profit downgrades don’t necessarily mean lower share prices, but investors should prepare for turbulence as Morgan Stanley ’s study over past revision cycles showed market swings tend to widen when earning sentiment sours.
“This earnings slowdown could have real knock-on effects to corporate behaviour like spending and hiring, which then put further pressure on growth,” he said. “Whether prices move higher or lower, volatility tends to rise meaningfully.”