Morgan Stanley: Wall deeper into the red even if recession is avoided

Stocks on Wall Street will likely see another slide even if the US economy manages to avoid recession, is Morgan Stanley’s assessment of the US market.

“The bullish rally (as of last Friday) may continue, but don’t think this bear market is over, even if we avoid a recession – a scenario that is increasingly likely to come true,” they stressed. in their note the analysts of the investment bank led by Michael J. Wilson.

Stocks on the Wall have tumbled this year, with the broader S&P 500 entering bear market territory, largely on heightened concerns that high inflation and aggressive rate hikes by the U.S. Federal Reserve will tip the economy into recession.

The possibility of an impending recession has risen further, with Morgan Stanley’s forecasting model showing a 36% chance of a recession within the next 12 months, while the bank is ringing the bell for rising jobless claims and shrinking vacancies. work.

Investors expect the Fed to raise interest rates by 75 basis points as soon as this month’s meeting, and are now focusing on a barrage of corporate earnings reports to see if corporate earnings have withstood the inflation rally and dour investment climate. .

Goldman Sachs analyst David J. Kostin expects the weak macroeconomic outlook to threaten corporate profitability, which has already retreated from historic highs. Profit margins and borrowing costs are now two key risks for stocks, which exited 2021 with positive momentum despite rising input costs, the impact of the pandemic and supply chain disruptions, as Kostin highlighted in a note of the 15th of July.

Morgan Stanley’s Wilson, one of the stock market’s most dedicated bears, who predicted the latest sell-off, appeared cautious on expectations that pressures on corporate earnings would ease after the second quarter of the year.

“Sustained pressures on labor, raw material, inventory and transportation costs combined with slowing demand threaten corporate earnings, a condition not seen in the soft estimates,” Wilson said, adding that even if forecasts for revenue growth to remain constant, the return of net earnings to pre-pandemic levels will mean a 10% loss in future earnings per share.

On the other hand, JPMorgan analysts estimate that investors will be asked to face even more “difficult” news regarding companies’ profitability during the summer. Typically, stock prices peak when earnings have hit – or are headed for – their worst levels, analysts led by Mislav Matejka said in a report, adding that the market may be nearing that point. where negative data starts to be considered good news.